Capital markets regulator Sebi has proposed a comprehensive review of the price discovery mechanism used during the pre-open call auction session for IPOs and relisted stocks, following concerns that existing rules may be artificially suppressing prices and distorting trading activity. According to the consultation paper released on Thursday, the regulator is seeking public comments on proposed changes to the Call Auction Session framework used on the listing or relisting day of stocks. The proposals were discussed with the Secondary Market Advisory Committee in November 2025, which recommended continuation of dummy price bands with improvements in the flexing mechanism and more realistic valuation methods for re-listed stocks.
The regulator noted that representations received from market participants suggested that the current system of dummy price bands and base price calculations was creating unintended distortions in relisted stocks. As reported by Sebi, representations have been received 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. The issue was resulting in persistent buying pressure once normal trading began, frequently leading to upper circuits and additional surveillance measures. In one instance, it was observed that during the Call Auction Session of the re-listed scrip, 90% of the buy orders were rejected due to being outside the price bands. The current practice frequently suppresses genuine price discovery, with stocks often witnessing intense buying pressure immediately after listing or re-listing, repeatedly hitting upper circuit limits in the normal trading session.
Under the proposed framework, Sebi has suggested revising the methodology for determining the base price of re-listed stocks. For trading revocations taking place within six months of suspension, the latest closing price available within six months on the same exchange, or another exchange, would be used. For revocations after six months of suspension, the base price would be determined solely on the basis of valuation certificates from two independent valuers, not older than three months. The existing system, particularly for re-listed companies suspended for over a year, often leads to unrealistically low base prices as the benchmark is generally the lower of book value or face value, subject to a minimum of ₹1 per share. In most cases, this results in a starting base price of just ₹10, regardless of the company's actual market potential or underlying value. For IPOs, the issue price itself acts as the base price, while SME IPOs operate within minus 90% to plus 90% of the base price during the pre-open session.
Sebi has introduced tighter disclosure norms for IPOs, requiring companies to disclose share pricing based on both new issues and secondary sales from the past 18 months. These norms also include provisions for mutual fund transactions to fall under insider trading regulations, ensuring greater accountability in the financial system. The regulator has modified the IPO application process to ensure that only valid applications are processed, with applications now accepted only if the necessary funds are blocked in the investor's bank account. The pre-filing option allows companies to submit offer documents confidentially, facilitating limited interactions without public disclosure of sensitive information. In the absence of recent market prices, the lower of valuations provided by two independent chartered accountants or valuation agencies would be considered. The dummy band would automatically expand by 10 per cent whenever the indicative equilibrium price comes within 10 per cent of either boundary. Sebi has recommended retaining the existing system but proposed a uniform flexing mechanism across all exchanges, with the revised proposal stating that whenever required, the widening or "flexing" of price bands should be implemented immediately to facilitate smoother price discovery.
The consultation paper explained that if equilibrium prices are not discovered during the IPO pre-open session, the stock moves into normal trading using the issue price as the base price, while for relisted stocks, if equilibrium prices are not discovered at any exchange, all orders are cancelled and the stock continues in the call auction mechanism on subsequent trading days until a price is discovered. Sebi said the objective of the consultation paper is to review whether the current framework remains appropriate amid evolving market conditions and trading behaviour, seeking feedback on whether these mechanisms require changes to improve efficiency and reduce price distortions. Sebi has sought public comments till June 11 on the proposals, providing market participants with adequate time to provide feedback on the comprehensive overhaul of the IPO price discovery mechanism. The regulator has endorsed continuing the existing special call auction mechanism used for listed Investment Companies (ICs) and Investment Holding Companies (IHCs), where price discovery is considered successful only if orders are received from at least five PAN-based unique buyers and five unique sellers. If price discovery is not achieved on the first day, the call auction process continues on subsequent trading days until a market-driven price is established.
