India, May 24: Securities and Exchange Board of India has proposed a major overhaul of the price discovery mechanism for Initial Public Offerings (IPOs) and re-listed companies during pre-open call auction sessions, aiming to eliminate artificial price suppression and improve market efficiency.
In a newly released consultation paper, the capital markets regulator highlighted concerns that the current trading framework particularly the use of dummy price bands and outdated base price calculations — has been creating distorted valuations during the initial stages of trading.
According to SEBI, several market participants raised concerns that the existing system often leads to artificially low opening prices for IPOs and re-listed stocks. This, in turn, results in intense buying pressure once regular trading begins, causing shares to repeatedly hit upper circuit limits and enter restrictive surveillance measures.
SEBI Plans Fresh Valuation Method for Re-listed Stocks
One of the key proposals focuses on revising the base price calculation mechanism for companies returning to trading after long suspensions.
At present, if trading in a company’s shares resumes after more than one year, the base price is generally fixed at the lower of the stock’s face value or historical book value often reducing it to as low as Rs 10. SEBI believes this outdated formula fails to reflect the company’s actual market worth and contributes to abnormal trading behaviour.
Under the proposed framework, if trading resumes within six months of suspension, the stock’s latest closing market price will be used as the base value.
However, if the suspension extends beyond six months or if historical price data is unavailable, the regulator has suggested a fresh valuation-based system. In such cases, the base price would be determined using valuation certificates issued within the previous three months by two independent chartered accountants or recognised valuation agencies.
Dynamic Dummy Price Bands Proposed
The consultation paper also recommends introducing automation to improve the functioning of dummy price bands during pre-open auction sessions.
Currently, trading systems do not permit adjustments to price bands in the final minutes before the random closure of market sessions. SEBI stated that this restriction can sometimes freeze trading activity and obstruct efficient price discovery.
To address this issue, the regulator has proposed allowing automated 10 per cent extensions in dummy price bands even during the random closure period. This dynamic mechanism is expected to reduce disruptions, improve liquidity and enable smoother trading during market openings.
Objective is Transparent and Efficient Trading
SEBI said the proposed reforms are aimed at creating a more transparent, fair and market-driven system for newly listed and re-listed securities.
Market experts believe the move could significantly reduce abnormal volatility in IPO and re-listed shares while improving investor confidence in the early stages of trading.
The regulator has invited public comments and stakeholder feedback on the consultation paper before finalising the revised framework for implementation.