India's capital markets regulator is considering significant changes to the price-discovery process for IPOs and relisted stocks during the pre-open call auction session, according to reports from Business Standard. The proposed measures aim to address concerns around inefficiencies in the existing framework, particularly in cases where a large number of investor orders are rejected because of restrictive price bands. The Securities and Exchange Board of India (SEBI) released a consultation paper on Thursday proposing reforms to the pre-open call auction session, a one-hour window before regular trading to set opening prices. The consultation paper remains open for public comments until June 11, 2026.
Sebi is looking to revamp the opening price mechanism for IPO listings after receiving market feedback that the current dummy price band system was resulting in poor price discovery. At present, mainboard IPOs operate with a dummy price band ranging from minus 50 percent to plus 100 percent of the base price, while SME IPOs currently have a fixed price band of plus or minus 90 percent. The regulator cited one instance where nearly 90 percent of buy orders placed during the call auction session were rejected because they fell outside the prescribed price range. The regulator did not propose any change to the base price mechanism for initial public offerings, which will continue to use the issue price. SEBI has proposed automatic expansion of these price bands by 10 percent whenever the indicative equilibrium price nears the upper or lower threshold.
For relisted companies, Sebi has proposed revising the method used to determine the base price, as reported by Business Standard. The regulator wants the latest traded price to be considered only if it is not older than six months. Where such market prices are unavailable, Sebi has suggested using valuation certificates issued by independent valuation agencies. In cases where shares are relisted after remaining suspended for more than six months, the base price should be determined using the lower of the book values assessed by two separate independent valuers. Among the proposed changes, SEBI suggested a shift towards a more "realistic" and market-linked base price for re-listed stocks, including using recent market prices or independent valuations. The regulator noted that the current mechanism often relies on old book values or face values for long-suspended companies, with shares reopening near ₹10 despite significantly higher book values.
To improve the system, Sebi has proposed a revised flexing mechanism under which stock exchanges would automatically widen the dummy price band by 10 percent whenever the indicative equilibrium price nears the upper or lower limit. The regulator also wants exchanges to automatically expand the band if buy or sell orders accumulate only at the extreme ends of the range, provided there are orders from at least five unique PAN-based investors. The proposed flexibility mechanism may also be extended to SME IPOs, a segment where such provisions are currently absent despite relatively higher volatility. The changes aim to improve price discovery and curb volatility on listing day, addressing concerns over suppressed pricing during pre-open trade. SEBI has also proposed a one-time immediate manual expansion of the dummy price band by 10% where buy orders are present only at the upper range or sell orders only at the lower range, subject to validation from at least five unique PAN-based investors.
Sebi has proposed making the call auction process valid only if the equilibrium price is discovered based on orders from at least five unique PAN-based buyers and five sellers. In cases where price discovery fails for relisted companies or firms undergoing corporate restructuring, the auction process may continue on subsequent trading days until an equilibrium price is successfully established. The regulator has invited public comments on the proposals until June 11, 2026. If price discovery fails on the first day of an IPO, however, the scrip would continue to move to the normal market at the issue price, as is the current practice. The existing mechanism currently operates as a one-hour pre-open call auction session between 9 am and 10 am on the first trading day, used to determine the equilibrium price before normal trading begins.
