MUMBAI: The Securities and Exchange Board of India (Sebi) has proposed changes to the price-discovery mechanism for initial public offerings (IPOs) and relisted stocks during the pre-open call auction session.
Under the proposed revised framework for determining the base price of relisted shares, Sebi has suggested using the latest traded price should not be older than six months. In cases where such prices are unavailable, the base price may be derived from valuation certificates issued by independent valuation agencies.
For stocks relisted after more than six months of suspension, Sebi has proposed using the lower of the book values determined by two independent valuers.
Besides relistings, Sebi has also proposed an overhaul for the mechanism used to determine the opening price for IPOs. The move comes after representations received by the regulator indicated that the current “dummy price band” formula and base price methodology were leading to inefficient price-discovery.
Sebi noted one case where 90 per cent of buy orders during the call auction session were rejected because they were outside the prescribed price bands. Mainboard IPO stocks currently have a dummy price band of minus 50 per cent to plus 100 per cent from the base price, while SME (small and medium enterprise) listings are capped at plus or minus 90 per cent without any flexing mechanism.
The regulator has now proposed changes to the flexing mechanism for dummy price bands. Exchanges would be required to automatically widen the bands by 10 per cent whenever the indicative equilibrium price approaches the upper or lower thresholds.
Additionally, if buy or sell orders accumulate only at the extreme ends of the price band, exchanges may automatically widen the range after validating orders from at least five PAN-based unique investors. Sebi has proposed extending the flexing mechanism to SME IPOs as well, where no such flexibility currently exists despite heightened volatility in the segment.
At present, IPOs and relisted securities undergo a one-hour pre-open call auction session between 9 am and 10 am on the first day of listing or relisting.
The mechanism is used to determine the equilibrium price before normal trading begins.
The regulator has further proposed that a call auction session would be considered successful only if price-discovery is based on orders from at least five unique PAN-based buyers and sellers. If price-discovery fails in relisted stocks or cases involving corporate restructuring, the call auction would continue on subsequent trading days until an equilibrium price is discovered.
Sebi has invited public comments on the proposals until June 11.
Source: Business Standard
