Shrinking price bands may trigger Sebi rule on keeping minimum 5% gap

The Securities and Exchange Board of India (Sebi) might soon mandate IPOs to have a minimum difference of 5 per cent between the upper and lower end of the price band. The move is to facilitate the so-called book building process used for price discovery during IPOs. Currently, the regulator prescribes a maximum range of 20 per cent. But in absence of a minimum threshold often the difference between the upper and lower end is a few percentage points, which according to Sebi, is diluting a fair and transparent price discovery. The regulator has data to back this claim. About a decade ago, the average price band range was 10 per cent. In recent years, it has reduced to less than 2 per cent. Industry observers say gone are the days when price discovery used to happen at the time of the IPO. Currently, the pricing is more or less finalized during the roadshows and anchor allotment. “The book-building process is reduced to a mere formality,” said one banker. In a discussion paper issued earlier this week, the regulator has hinted that the process therefore be moved from book-building to fixed-price issues.