Summary of this article
Sebi proposes new pre open call auction framework
Automatic flexing dummy price bands expand by ten percent
Minimum ten unique verified traders must validate market interest
The primary market has witnessed strong momentum over the last few years led by rising retail participation and several companies opting for the Initial Public Offerings (IPOs) to list their shares on the exchanges.
Amid the heightened interest in the primary market, the Securities Exchange Board of India (Sebi) has proposed a new mechanism to ensure accurate pricing of stocks when they debut or resume trading on the exchanges after re-listing. The regulator seeks to maintain integrity and prevent price distortions on listing day by continuously evaluating the trading mechanism.
Sebi’s Proposed Overhaul of Price Discovery Mechanism
Sebi issued a new consultation paper on May 21, aimed at revamping the pre-open call auction session for stocks which are set to debut on the exchanges post their IPOs and re-listed companies. Sebi highlighted in the paper that it originally designed the existing mechanism to prevent erratic price movements. However, the mechanism has occasionally acted as a constraint leading to artificially suppressed price discovery or persistent buying pressure leading to continuous upper circuits.
Thus to rectify these issues, Sebi has proposed a revised methodology for determining the initial base prices for such stocks along with an automated, real-time mechanism to widen trading bands during the pre-open hour on the listing date for IPO-stocks and re-listing day for re-listed stocks.
Pre-Open Pricing Mechanism
As a part of the proposed guidelines, Sebi has introduced changes to how initial listing values are determined. For shares of re-listed companies, returning to the bourses after a suspension of over six months, the base price will be derived from independent valuation certificates issued by two valuation agencies.
Apart from this, the regulator has also introduced an automatic flexing mechanism for dummy price bands. Notably, dummy price bands are temporary, flexible price limits used in the pre-open hour to stop stock prices from swinging wildly before the market opens for regular trading.
Under the existing rules, if investors place orders that go past the limits of the dummy price band, their orders would be rejected, which would disrupt the price discovery process. The new mechanism checks whether the real-time calculated price of the stock gets too close to the limits of the dummy price band and automatically stretches the band by 10 per cent to accommodate the demand.
While the dummy price band becomes flexible, the regulator has also put in place a mechanism to determine whether the market’s interest in a stock is genuine or not and ensure that the listing price is not manipulated by one or two large players. In order to do so the regulator has also introduced a call auction session which will only be considered successful if it includes active orders from a minimum of five unique, PAN-verified buyers and five unique sellers.
How Sebi’s New Price Discovery Mechanism Impacts You
Once the proposed regulations are enforced, investors will be protected from artificial pricing traps and reduce the risk of large institutional orders being dropped.
"During the Call Auction Session of the re-listed scrip, 90 per cent of the buy orders were rejected due to being outside the price bands," Sebi said.
By making price bands flexible, retail investors will be able to trade stocks at realistic opening prices, avoiding the panic of chasing stocks that lock into upper circuits as soon as the market opens for trading.
Distorted Valuations For Relisted Scrips
Sebi mentioned in the paper that the regulatory push follows observations of instances where the price discovery mechanism suppressed the true value of re-listed entities. Historically, companies returning to the market after long suspensions often see their base prices pegged to old book values or historical face values.
"Thus, in most of the cases the base price starts with Rs. 10," Sebi said.
The base price being determined on the basis of the old book value creates an artificial floor for the stock’s price and results in massive imbalances when trading resumes.
According to the paper, public consultation on the proposal remains open for stakeholder feedback, and market participants can submit their comments till June 11, 2026.
The regulator seeks to deepen investor trust in the primary market by establishing a level playing field where prices genuinely reflect public demand as soon as the stock lists.
