SEBI Tightens IPO Price Discovery Norms to Prevent Manipulation

The Securities and Exchange Board of India (SEBI) has introduced new measures and surveillance protocols to prevent manipulation during the process of determining the opening price for stocks on their listing day following an initial public offering (IPO). This process, known as the pre-open call auction session, occurs for one hour on the listing day, during which market participants place bids at specific prices that are then matched to set an opening price.

SEBI identified cases where orders were placed at high prices in large volumes during the call auction session but were canceled just before the session closed, creating a false demand and supply, potentially manipulating stock prices.

To address this, SEBI has introduced a random closure of the order entry period during the last 10 minutes of the session, occurring anytime between the 35th and 45th minute, driven by the system.

Furthermore, stock exchanges must send alerts if a client's canceled quantity or value exceeds 5% of total cancellations in the session, or if over 50% of the client's orders are canceled.

Exchanges may also seek explanations for such cancellations or price modifications. Real-time bid data will be available on the exchange website. These new norms will be effective in three months.

Previously, the call auction methodology was implemented to reduce the significant volatility seen in share prices on listing days. The special pre-open session for IPO shares runs from 9 AM to 10 AM before normal trading begins and includes three phases: a 45-minute open order placement session for entering, modifying, and canceling orders; a 10-minute order matching and execution session to determine the equilibrium price based on demand and supply; and a 5-minute buffer period for transitioning to normal trading.

For IPOs under Rs 250 crore, the price band for normal trading is 5%. For IPOs over Rs 250 crore, share prices can fluctuate within a 20% band during normal trading on the first day.

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