The Securities and Exchange Board of India (SEBI) has proposed automatic and faster expansion of price bands whenever strong investor demand emerges, reducing the need for manual intervention by exchanges. According to the latest consultation paper issued on Thursday, the regulator stated that "the mechanism for flexing the dummy price bands should be uniform across exchanges and whenever required, the flexing of the price band shall be done immediately." The new framework introduces a more dynamic mechanism for widening price bands to prevent persistent buying pressure and upper circuit hits seen in re-listed securities. Under the proposed system, exchanges shall flex the dummy price bands in multiples of 10 per cent, automatically based on pre-defined logic and/or in consultation with other Exchanges. The flexing mechanism should also operate during the random closure period from 09:35 am to 09:45 am.
For companies resuming trading after six months or less of suspension, exchanges will first use the latest traded closing price on the same exchange. If that is unavailable, they may use the latest traded price from another exchange. As reported by CNBC TV18, if no recent traded price is available, the base price will be determined using valuation reports from two independent chartered accountants or valuation agencies. For companies re-listed after more than six months of suspension, the opening base price would be determined only through independent valuation reports. The new framework introduces a more dynamic mechanism for widening price bands to prevent persistent buying pressure and upper circuit hits seen in re-listed securities.
Under the current system, if a company has remained suspended for more than one year, the opening base price is often determined using face value or old book value. According to CNBC TV18, this method results in stocks reopening at around ₹10 even if the company's actual value or book value is much higher. The regulator noted that this method does not reflect the present value of the company and may distort the price discovery process. The current dummy price band system allows IPO stocks to trade within a dummy price range of -50% to +100% of the base price during the pre-open session, while relisted stocks have a permissible band of minus 85% to plus 50%, and SME IPOs can function within a range of minus 90% to plus 90%. As reported by LiveMint, SEBI clarified that equilibrium prices during the session are determined by the maximum volume of executable orders, with unified equilibrium prices determined by volume-weighted averages if prices vary across exchanges.
SEBI has proposed that the price discovery process should be considered successful only if at least five unique PAN-based buyers and five unique PAN-based sellers participate in the auction. According to CNBC TV18, currently, even a single matching order can determine the opening equilibrium price. The regulator believes these new requirements will improve market integrity and reduce chances of price manipulation in illiquid stocks. The new framework also includes changes to the pre-open call auction process, including a new methodology for determining base prices and a more dynamic mechanism for widening price bands. At present, IPOs and relisted stocks participate in a one-hour pre-opening call auction session from 9 AM to 10 AM on their listing day, where only limit orders are allowed, with exchanges using various methods to calculate base prices for relisted stocks, while IPOs use the issue price as their base price.
The proposal addresses real-world examples, including the re-listed shares of Swan Defence, which faced such issues despite having a book value of ₹1,578.48 per share. As reported by CNBC TV18, the stock was listed at ₹35.99 on the BSE, which was automatically carried forward as the opening price on the NSE. The stock finally crossed the book value mark last year, around December. The regulator's consultation document published on Thursday seeks public input on whether modifications to the existing framework are needed to boost efficiency, improve price discovery, and minimise distortions, in light of changing market conditions and trading practices. The current pre-open call auction mechanism is leading to situations where genuine investor orders are getting rejected, resulting in artificially low opening prices in some stocks.
