The capital markets regulator, SEBI, is considering a significant overhaul of how opening prices are discovered for IPOs and relisted shares. In a fresh consultation paper, the regulator expressed concerns that the current mechanism might be interfering with actual market forces, throwing off initial prices and distorting genuine market demand. Market participants have frequently called out the current dummy price band mechanism and the lack of standardization in setting base prices for relisting corporations, noting that these structural bottlenecks lead to unnecessary disruptions right when a stock debuts.
According to SEBI, these initial pricing distortions tend to spill directly into the normal trading session, triggering heavy buying pressure as soon as regular trading begins. This artificial momentum often locks stocks into their upper circuits and unnecessarily triggers surveillance mechanisms. Currently, both new IPOs and relisted counters go through a designated one-hour pre-opening call auction session between 9:00 AM and 10:00 AM on day one, during which only limit orders are accepted. While mainboard IPOs use the fixed issue price as their reference point, stock exchanges currently follow differing internal rules to set the base price for relisted scripts, causing further confusion.
The regulator noted that the existing dummy price bands, which were originally intended to act as a safeguard, are actually hindering efficient price discovery. Under current regulations, mainboard IPOs trade within a dummy band of minus 50% to plus 100% of their base price during the pre-open session, while SME IPOs run on a band of minus 90% to plus 90%. On the other hand, relisted stocks operate within a band of minus 85% to plus 50%. Highlighting the flaws of this system, SEBI pointed to a specific case where roughly 90% of all buy orders placed during a relisted stock's auction had to be automatically rejected because they sat outside these rigid price boundaries.
Under the current system architecture, market equilibrium prices during the pre-open hour are calculated based on the highest volume of executable shares. If different exchanges generate conflicting equilibrium prices, a single unified price is calculated using volume-weighted averages. To streamline these operational friction points, SEBI has opened the floor for public feedback on whether the existing framework needs a revamp. The broader goal is to improve market efficiency, ensure unobstructed price discovery, and minimize structural market distortions as trading dynamics continue to evolve.
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