Why Sebi Wants Exchanges To Follow A Common Price Band For Stocks

Securities and Exchange Board of India (Sebi) has proposed a uniform mechanism for determining price bands and pre-open session base prices for stocks listed on multiple exchanges, seeking to address significant price differences in illiquid stocks when they are traded on one exchange but remain inactive on another.

In a consultation paper released on June 11, the regulator said the proposal aims to harmonise the base price used for pre-open call auctions and daily price bands across exchanges. The regulator has invited public comments until July 2.

At present, stock exchanges apply stock-specific price bands of up to 20 per cent on either side of the previous closing price for securities that are not part of the derivatives segment. The previous day's closing price is also used as the base price for the pre-open session. Since exchanges independently use their own closing prices as reference points, disparities can develop when a stock remains inactive on one exchange while continuing to trade on another.

Sebi said the issue has been particularly visible in thinly traded stocks. “In respect of a few illiquid scrips, it has been observed that non-trading of scrip on one of the exchanges and a persistent buy side pressure along with the practice of application of price band on the previous day closing price has been causing significant price divergence in the closing prices of the scrips across the exchanges,” the regulator said. “Such divergence also holds the potential of non-trading of the scrip on one of the exchanges.”

Kinjal Shah, vice president, Bombay Chartered Accountants’ Society, said the proposal is aimed at addressing a practical market issue where the same stock can show different prices across exchanges, particularly in thinly traded counters. “By linking the price band and pre-open reference price to the most active exchange, the gap should narrow. This would reduce opportunities for traders to exploit mismatches. However, it will not remove all price differences, because genuine market movement, news flow, and liquidity conditions can still cause variation,” he said.

To address this, Sebi has proposed that if a stock trades on only one exchange on a given day, the exchange where no trading occurred should use the closing price of the active exchange to determine the next day's price band and pre-open auction base price.

Where a stock trades on two or more exchanges but remains inactive on one or more exchanges, the non-trading exchange would use the closing price from the exchange that recorded the highest trading volume in that stock for setting the subsequent day's price band and pre-open reference price.

If a stock trades on all exchanges, or does not trade on any exchange, each exchange will continue to use its own latest closing price for determining price bands.

The proposal follows recommendations made by Sebi's Secondary Market Advisory Committee in April. Sebi said the framework is intended to reduce progressive divergence in prices across exchanges, improve consistency in price bands and strengthen price discovery in illiquid securities.

According to Shah, retail investors stand to benefit from greater consistency in stock prices across trading venues. “The proposed framework may improve price discovery, reduce stale or distorted prices, and lower the risk of buying at an unfairly different price on a less active exchange. It can also make the market look more transparent and orderly. For common investors, the main gain is better protection against price anomalies, though it will not guarantee profits or higher returns,” he said.

For implementation, exchanges will be required to enter into agreements, memoranda of understanding or other arrangements to facilitate sharing of closing-price data among themselves.

However, Shah cautioned that implementation and surveillance would be critical, particularly for illiquid stocks. “If the most active exchange becomes the reference point, a trader may try to influence the price there to affect bands on other exchanges. That is why surveillance and safeguards will matter. Still, the proposal appears designed to reduce divergence, not increase it. If implemented carefully, with monitoring for unusual trades, it should improve fairness more than it creates risk,” he said, adding that the final outcome would depend on Sebi's guardrails and exchange-level controls.