Sebi proposes changes to pre-open listing session of IPOs

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In a consultation paper released on Tuesday, Sebi said it is seeking public comments on proposed changes to the Call Auction Session framework used on the listing or relisting day of stocks.

The regulator said representations received from market participants suggested that the current system of dummy price bands and base price calculations was creating unintended distortions in relisted stocks.

“Representations have been received by Sebi stating that the dummy price band and the mechanism for base price in case of re-listed scrips are leading to situations of artificially suppressed price discovery,” the paper said.

Sebi noted that the issue was resulting in persistent buying pressure once normal trading began, frequently leading to upper circuits and additional surveillance measures.
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Under the existing framework, IPO and relisted stocks undergo a one-hour pre-open call auction session between 9 am and 10 am on listing day. The session currently allows only limit orders and does not permit market orders.

The regulator explained that stock exchanges presently use different methodologies for calculating base prices for relisted stocks depending on factors such as the period of suspension and revocation of trading. For IPOs, the issue price itself acts as the base price.

Sebi said one instance showed how the current framework was restricting effective price discovery.

“In one of the instances, it was observed that during the Call Auction Session of the re-listed scrip, 90% of the buy orders were rejected due to being outside the price bands,” the paper said.

The regulator also highlighted concerns around the current dummy price band mechanism. At present, IPO stocks operate within a dummy price range of minus 50% to plus 100% of the base price during the pre-open session, while relisted stocks use a range of minus 85% to plus 50%. For SME IPOs, the range is minus 90% to plus 90%.

Sebi said stock exchanges currently flex these dummy bands in phases depending on equilibrium prices discovered during the session.

The regulator now wants feedback on whether these mechanisms require changes to improve efficiency and reduce price distortions.

The consultation paper also explained how price discovery currently works. According to Sebi, the equilibrium price is determined at the level where maximum executable volume exists during the call auction session.

If equilibrium prices differ significantly across exchanges, a common equilibrium price based on volume-weighted average prices is determined.

Sebi noted that if no equilibrium price is discovered during the IPO pre-open session, the stock moves into normal trading using the issue price as the base price. For relisted stocks, if equilibrium prices are not discovered at any exchange, all orders are cancelled and the stock continues in the call auction mechanism on subsequent trading days until a price is discovered.

The regulator said the objective of the consultation paper is to review whether the current framework remains appropriate amid evolving market conditions and trading behaviour.
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