SEBI Strengthens IPO Price Discovery Guidelines To Combat Manipulation

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

The Securities and Exchange Board of India (SEBI) has introduced enhanced measures and surveillance to prevent manipulation in the calculation of the opening price for stocks on the day they are listed after an initial public offering (IPO). This process, known as the pre-open call auction session, spans one hour on the listing day. During this session, market participants submit bids at designated prices, which are subsequently matched to determine the stock's opening price.

In some instances of IPOs and relisted stocks, the market regulator noted that despite substantial volumes of orders placed at higher prices during the call auction, a considerable portion of these orders were cancelled shortly before the session concluded. This created artificial fluctuations in supply and demand, potentially manipulating the prices of the stocks.

SEBI has implemented random session closures during the order entry phase to mitigate this issue.

“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 the market watchdog.

In response, the regulators aim to tackle order cancellations and artificial demand. Additionally, stock exchanges have been instructed to issue alerts if a specific client's cancelled quantity or value surpasses 5 per cent of total cancellations in the session or if more than 50 per cent of orders from that client are cancelled.

Stock exchanges may request explanations for such cancellations or price modifications. Real-time bid data will also be accessible on the website. These regulations will come into effect after three months.

Before adopting the call auction method, share prices often experienced significant volatility on listing days.

The special pre-open session for IPO shares occurs between 9 am and 10 am, preceding regular trading. This session comprises three phases: an initial 45-minute window for order placement, modification, and cancellation, with no executions during this period.

The order matching and execution session occurs from 9:45 to 9:55 a.m. During this time, exchanges determine the "equilibrium price" based on the demand and supply observed in the first 45 minutes for IPO shares. The final five minutes serve as a buffer period to smoothly transition from the pre-open session to regular trading.