SEBI Issues Price Band Formulation For Share Trading On First Day After IPO

According to SEBI's circular, the decision has been taken after discussions with stock exchanges and SEBI's Secondary Market Advisory Committee (SMAC). 

The framework aims to streamline price band discovery on the secondary market. 

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The Securities and Exchange Board of India (SEBI) on Tuesday announced the new framework for fixing the price band for trading in share market on the first day of listing after an IPO. The framework aims to streamline price band discovery on the secondary market. 

According to SEBI's circular, the decision has been taken after discussions with stock exchanges and SEBI's Secondary Market Advisory Committee (SMAC). 

According to SEBI the following has been decided for trading on the first day pursuant to IPO or re-listing (including re-listing on account of the scheme of the arrangement but excluding scrips for which derivative contracts are available):

• Call Auction session would continue to be conducted separately on individual exchanges and orders would be matched by respective exchanges after computation of equilibrium price.
• If difference in the equilibrium price between exchanges in percentage terms (i.e. absolute difference/minimum of equilibrium prices, expressed as %) is more than the applicable price band for the scrip, a Common Equilibrium Price (CEP) would be computed by exchanges. The CEP shall be volume weighted average of equilibrium prices on individual exchanges as determined by the Call Auction.
• The exchanges shall set the aforesaid CEP in their trading systems and apply uniform price bands based on the CEP, as applicable.
• Only unexecuted pending orders from Call Auction session within the aforesaid price band shall be carried forward to the normal market segment.

Several stock exchanges hold call auction sessions when a stock is about to trade for the first time following its IPO. It's possible that the equilibrium price or found price following such call auction sessions will vary depending on the exchange. If the gap between these discovered prices is wide, price bands on different exchanges could be widely off from one another, giving investors a false impression of the price band.

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. The new framework would come into force after 60 days on June 10.