The ambiguity of price discovery for IPO shares on the listing day is likely to be a thing of the past. SEBI has now asked the exchanges to compute an equilibrium price for the newly-listed stocks at the end of the day’s trading session on the first day of listing. The ongoing call auction system, where all the bids are collected first and then matched, will continue separately on the exchanges but the final closing price on the NSE and the BSE will be the same based on the equilibrium calculation, as per SEBI’s new circular. 

SEBI’s circular on the formulation of price bands for the first day of trading after IPO, re-listing, etc., in the normal trading sessions, has said call auction sessions will continue to be conducted separately on individual exchanges. After discussion with stock exchanges and Secondary Market Advisory Committee, SEBI has said orders will be matched by respective exchanges after the computation of the equilibrium price.

SEBI has declared that if the difference in the equilibrium price between exchanges in percentage terms (i.e. absolute difference or a minimum of equilibrium prices, expressed as a percentage) is more than the applicable price band for the script, a common equilibrium price (CEP) will be computed by exchanges.

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CEP will be a volume-weighted average of equilibrium prices on individual exchanges as determined by the call auction. The exchanges will set the aforesaid CEP in their trading systems and apply uniform price bands based on the CEP. Further, only unexecuted pending orders from call auction sessions within the price band will be carried forward to the normal market segment. The provisions of this circular will come into effect after 60 days from the date of issuance.

SEBI has asked exchanges to put in place systems for implementation of the circular, including necessary amendments to the relevant bye-laws, rules, and regulations. SEBI has also asked stock exchanges to communicate the status of the implementation of the provisions of this circular in the monthly development report.

The call auction mechanism for IPOs was started by SEBI in January 2012. According to SEBI, since call auction sessions are conducted on multiple stock exchanges, the discovered price or equilibrium price pursuant to such call auction sessions could be different on each exchange.

“If the difference in these discovered prices is significant, there could be a situation wherein price bands on individual exchanges are far apart from each other, giving an incorrect picture of price band to investors,” said SEBI.

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