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India: SEBI Proposes New Price Discovery Mechanism for IPOs and Relisted Stocks
India's capital markets regulator, SEBI, has proposed changes to the price discovery process for initial public offerings (IPOs) and relisted securities. The changes aim to enhance price accuracy and reduce volatility, introducing a new call auction.
SEBI's Proposed Reforms
India's Securities and Exchange Board of India (SEBI) has initiated a proposal to revise the price-discovery mechanism for initial public offerings (IPOs) and relisted securities during their pre-open call auction sessions. This regulatory move seeks to improve price accuracy and mitigate volatility in these market segments.
For relisted shares, SEBI has suggested that the base price for trading be derived from valuation certificates provided by independent valuation agencies. Currently, the base price is often determined by the lower of two independent valuers. Under the new framework, the latest traded price of a relisted stock should not be older than six months. If historical trading data is unavailable, the base price will still rely on independent valuation certificates.
Call Auction Mechanism and Price Bands
The regulator's proposal introduces a new pre-open call auction mechanism for price discovery in IPOs and relisted stocks. This mechanism will utilize dynamic price bands. For IPOs, a band of 20 percent above or below the offer price will apply. For small and medium enterprise (SME) listings, this band will be capped at 5 percent above or below. Relisted stocks will operate within a band of 10 percent above or below the base price.
To further control volatility, SEBI proposes expanding these bands by an additional 10 percent when the indicative equilibrium price reaches the upper or lower threshold. Orders will only accumulate at the extremes of the price band, and exchanges will automatically widen the range after validating data from at least five unique PAN-based investors. This layered approach aims to ensure prices reflect genuine market sentiment.
Ensuring Fair Price Discovery
A critical component of the proposed framework is the requirement for a call auction session to be deemed successful. Price discovery must be based on orders from a minimum of five unique PAN-based buyers and sellers. This criterion aims to prevent manipulation and ensure broad market participation in price formation.
If price discovery fails for relisted stocks or in cases of corporate restructuring, the call auction will continue on subsequent trading days until an equilibrium price is established. This ensures that trading does not commence without a fair and transparent price being determined. SEBI has extended an invitation for public comments on these proposals, with the deadline set for June 11.
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