Sebi tightens norms for IPO price discovery to curb manipulation

Introduces critical tweak to weed out fake orders during call auction

The Securities and Exchange Board of India (Sebi) has imposed additional measures and surveillance to curb manipulation in the process involved to compute the opening price for a stock on the day of its listing following an initial public offering (IPO). The one-hour process followed on the day of listing is called the pre-open call auction session, during which market participants place bids at specific prices, which are later matched to arrive at an opening price.

In certain cases of IPOs and relisted scrips, the market regulator observed that though orders were being placed at higher price in large volumes during the call auction, a significant portion of these orders were cancelled just before the session closed. This led to false demand and supply, leading to possible manipulation of prices of the scrips.

To address this, Sebi has introduced random closure of the session during the order entry period.

“The session shall close randomly during the last 10 minutes of order entry, i.e. any time between 35th and 45th minute of the order entry window. Such random closure shall be system-driven,” said Sebi.

With this the market watchdog wants to address order cancellations or false demand.

Further, stock exchanges have been directed to send alerts if the cancelled quantity or value for a particular client exceeds 5 per cent of the total cancellations in the session, or if over 50 per cent of the orders for that single client are cancelled.

Stock exchanges may also seek explanations for such cancellations or modifications in prices. The real-time data for bids will also be made available on the website. These norms will kick-in after three months.

Prior to implementation of the call auction methodology, share prices used to witness huge volatility on the day of listing.

The special pre-open session for IPO shares is conducted between 9am and 10am before normal trading resumes. It is conducted in three phases — open order placement session lasts for the first 45 minutes during which orders may be entered, modified and cancelled, but no orders are executed during this time.

Between 9:45 am and 9:55 am, order matching and execution session takes place. Based on the demand and supply for IPO shares in the first 45 minutes, exchanges arrive at a so-called “equilibrium price”, which acts as the opening price. The remaining five minutes is buffer period to facilitate the transition from pre-open to the normal trading session.

For IPO size of less than ~250 crore, the price band is 5 per cent for normal trading. Share prices of companies with IPOs of more than ~250 crore are allowed to move in a 20 per cent band during normal trading on the first day.