SEBI Considers IPO Price Discovery Tweaks for Relisted Stocks
Overview
India's market regulator SEBI is exploring significant adjustments to its Special Pre-Open Session (SPOS) for initial public offerings and relisted securities. The move aims to enhance price discovery by reviewing dummy price bands, base price calculations, and order validation rules. These changes seek to prevent artificially suppressed valuations, such as the Swan Defence case, and ensure fairer market entry prices.
SEBI Proposes Overhaul of IPO and Relisted Stock Pricing Mechanism
The Securities and Exchange Board of India (SEBI) is actively reviewing its Special Pre-Open Session (SPOS) framework for initial public offerings (IPOs) and securities returning to trading. The objective is to refine price discovery mechanisms and address past valuation anomalies that have concerned market participants.
Addressing Price Suppression
Concerns have been raised that existing regulations, particularly concerning dummy price bands and the methodology for fixing base prices for relisted scrips, can lead to artificially suppressed valuations. The case of Swan Defence, where shares were discovered at approximately ₹36 despite a book value exceeding ₹1,500 per share, highlights these issues. Currently, the base price is often set as the lower of face value or book value for stocks suspended for over a year, which critics argue fails to reflect economic reality.
Refining Dummy Price Bands
While SEBI intends to retain dummy price bands as a risk-management tool to prevent 'fat finger' errors, it seeks to make the framework more consistent and less restrictive. Proposals include ensuring a uniform mechanism for flexing these bands across all exchanges and applying them dynamically when necessary. The current system allows flexing only up to a minute before the random closure period, limiting responsiveness.
Call Auction Framework Integration
To further bolster price discovery, SEBI is considering incorporating elements from the special call auction framework used for investment companies. A key proposal is that an SPOS session will only be deemed successful if the discovered price is based on orders from at least five unique buyers and sellers. If price discovery fails on the first day, the session would continue to the next trading day until a realistic price is established, preventing outcomes based on a limited number of trades.
Next Steps
The regulator also plans to revise the base price methodology to ensure it reflects the present value of a scrip more accurately, potentially leaning more heavily on book value. These proposals have reportedly received initial approval from industry stakeholders and will undergo public consultation before final implementation. SEBI did not comment when contacted.
