The (SEBI) is considering changes to the special pre-open session (SPOS) mechanism for and relisted scrips, including a review of dummy price bands, flexing norms, and the methodology for fixing base prices to avoid distorted price discovery, people aware of the discussions said.
The current regulations don’t allow price bands for re-listed scrips during pre-open session to allow fair price discovery. However, stock exchanges set dummy price bands in the range of -85 per cent to 50 per cent of base price to avoid members from entering the wrong number, also known as fat finger errors, during the session or orders.
This came under scrutiny a year ago after Swan Defence represented to SEBI that its shares were discovered at a price of about ₹36 during SPOS, despite a book value of over ₹1,500 per share. The company argued that the use of face value as the base price, coupled with dummy price bands, led to artificially suppressed price discovery and harmed shareholders.
Further, the base price is taken as the lower of face value or book value, especially where a stock has been suspended for more than a year.
Uniform flexing
Sources said the regulator plans to continue with dummy price bands during SPOS as a risk-management measure, but wants the framework to be more consistent and less restrictive to allow better participation. “The view is that dummy price bands serve a purpose, but they should not come in the way of fair price discovery,” said a person familiar with the matter.
A proposal under consideration is that the mechanism for flexing dummy price bands during SPOS should be uniform across exchanges and applied immediately whenever required.
Currently, the dynamic price bands placed by exchanges are flexed in multiples of 10 per cent manually in coordination with other exchanges, and is allowed only up to 1 minute prior to the random closure period, i.e. 09:35 a.m. to 09:45 a.m. So, even if the SPOS is in operation beyond 09:35 a.m. there can’t be any flexing of the dummy price bands.
Equilibrium price
To further strengthen price discovery, SEBI also plans to adopt elements of the special call auction framework used for listed investment companies and investment holding companies, another source said.
SPOS would be treated as successful only if the discovered price is based on orders from at least five PAN-based unique buyers and sellers. “If the call auction is not successful on day one, the proposal is that it should continue on the next trading day and so on, till a price is discovered,” the source said, adding that this could prevent prices being set based on a handful of trades.
The base price methodology adopted by exchanges will also be tweaked for a more “appropriate and realistic” approach that reflects the present value of the scrip, potentially relying more meaningfully on book value. “The idea is that the base price for relisted stocks should not be mechanical, but should reflect economic reality,” one person said.
At present, exchanges use the lower of book value received from statutory auditor of the company, which is not older than 6 months, or face value, subject to minimum of ₹1 per share, if the company was suspended more than 1 year before the said session.
The proposals have been approved by industry participants, and will be internally considered before public consultation. An email sent to SEBI for comments did not elicit a response.