SEBI proposes revamp of pre-open price discovery, aims to curb artificial price suppression
Mumbai, May 22
Aiming to overhaul the price discovery mechanism for Initial Public Offerings and re-listed companies during their Pre-open Call Auction Sessions, the Securities and Exchange Board of India has released a consultation paper on Thursday.
The market regulator's proposal addresses growing concerns that current trading frameworks--specifically dummy price bands and base price setups--are distorting initial trading values.
SEBI said in its consultation paper that "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".
This suppression has historically triggered immediate, persistent buying pressure in the normal trading market, causing affected shares to repeatedly hit upper circuits and enter restrictive surveillance measures.
A primary focus of the consultation paper is the re-evaluation of base price calculation for re-listed scrips.
Under the current system, if a company's trading suspension is revoked after more than a year, its base price often defaults to a meagre Rs 10 because it relies on the lower of the face value or the older book value.
The apex market regulator intends to substitute this with a more realistic, market-reflective approach.
The new proposal dictates that if a revocation occurs within six months of suspension, the latest closing price on the stock exchange will be used.
If the suspension exceeds six months, or if historical prices are unavailable, the base price will be determined using fresh valuation certificates--not older than three months--issued by two independent chartered accountants or valuation agencies.
Furthermore, SEBI plans to introduce automation and relax restrictions regarding the flexible execution of dummy price bands. Currently, no adjustments to price bands are permitted within the final minutes leading up to a system-driven random market session closure.
The proposed changes will allow automated price band extensions of 10 per cent to function dynamically even during this critical random closure window, preventing system freezes.
Additionally, to validate true market liquidity, a call auction session will only be deemed successful if it registers orders from at least five unique, PAN-verified buyers and sellers.
The public and market stakeholders have been invited to submit their comments on these structural changes by June 11.
— ANI
Reader Comments
As a small investor, this is much needed. The dummy price band system was clearly being misused by operators to create artificial demand. But I'm worried about one thing - will this automation of price bands lead to even more volatility in the first few minutes of trading? Sometimes the old system's rigid bands acted as a circuit breaker. Let's see how this plays out.
Interesting proposal from an institutional perspective. The requirement for 5 unique PAN-verified buyers and sellers to validate liquidity is smart - it prevents fake order books. However, I wonder if this might cause delays for legitimate small cap IPOs where genuine liquidity is low. Also, valuation certificates from two independent CAs could add significant costs for companies coming out of long suspensions.
Yeh sab theek hai, but will SEBI actually implement it strictly? We've seen so many consultation papers gather dust. The core issue is that promoters and operators game the system. This valuation certificate approach might work if they also monitor for conflict of interest - some CAs are known to give any valuation the client wants. Automation of price bands is a step in the right direction though. 👏
This is a textbook case of fixing a market flaw. The Rs 10 base price mechanism was archaic and clearly manipulated. Using the last closing price within 6 months is logical, and for longer suspensions, independent valuation is appropriate. My concern is the 5 unique participants rule - in India's market, many stocks have concentrated holdings. Will this cause legitimate trading to be blocked? Need to see the fine print.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.