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India's market regulator, SEBI, is introducing proposed changes to its rules for initial public offerings (IPOs) and the relisting of securities. The goal is to create more efficient capital markets by improving how prices are determined for both new listings and stocks returning after a suspension.
Better Valuations for Relisted Stocks
For companies preparing to relist, SEBI now requires that recent trading data used for pricing must be less than six months old. If older data isn't sufficient, independent valuation certificates will be needed. If a stock has been suspended for more than six months, its base price will be set by the lower valuation from two independent experts, aiming for a more realistic starting point.
Improving IPO Price Setting
SEBI is addressing issues with the current IPO pricing system, which has been criticized for leading to poor price discovery and a high number of rejected buy orders, sometimes nearly 90%. The new plan includes a flexible mechanism: stock exchanges can automatically widen the price band by 10% if the indicative price approaches the band's limits. The band will also widen if orders become heavily concentrated at the price extremes, provided at least five unique investors participate. These flexibilities are also being considered for SME IPOs, which currently lack them despite experiencing greater volatility.
Strengthening Call Auctions
The regulator also wants to ensure the integrity of the one-hour pre-open call auction. SEBI's proposal requires that the final price (equilibrium price) be determined by orders from at least five unique buyers and sellers. If price discovery is difficult for relisted or restructured companies, the auction may be extended to subsequent trading days to ensure a more reliable price is found before regular trading begins. SEBI is seeking public comments on these proposals until June 11.
Global Market Alignments
These proposed changes are similar to efforts by regulators in other countries to improve price discovery in markets prone to volatility. While SEBI's focus is on call auctions and price band adjustments, the underlying aim aligns with global standards for fair and orderly markets. The success of these measures will depend on how exchanges adopt them and how the market responds, especially regarding the use of independent valuations for relisted entities.
What This Means for Investors
While these reforms aim to reduce rejected orders and improve price discovery, investors should remain cautious. The use of independent valuations for relisted stocks could introduce subjectivity and potential mismatches between valuations and market demand. The dynamic price band widening, though intended to aid price discovery, might still lead to initial trading volatility. The investment community will be watching closely to see how these changes affect upcoming IPO pricing and the trading of relisted stocks.