SEBI IPO price discovery overhaul: 5 SPOS proposals

What changed in SEBI’s latest IPO push

The Securities and Exchange Board of India (SEBI) has introduced new IPO regulations aimed at improving transparency, investor protection, and market efficiency. The changes span multiple parts of the issuance and listing process, including anchor investor norms, offer-for-sale rules, listing timelines, and price discovery mechanisms.

A key focus now is how listing-day prices are discovered, especially when stocks are about to list or when a security returns to trading after a long gap. SEBI has begun consultations with stock exchanges and other market participants on whether the existing framework needs structural changes. The regulator’s broader intent is to reduce valuation anomalies that can hurt retail investors and weaken confidence in listings.

Why SPOS is under review

SEBI is likely to make changes to the Special Pre-Open Session (SPOS) mechanism for listing-bound stocks and to review the use of dummy price bands. The regulator plans this review to avoid distorted price discovery for stocks expected to list soon. Concerns have also been raised about price discovery for re-listed securities, including those emerging from insolvency resolution.

The debate has sharpened after concerns flagged around the price discovery of Swan Defence’s re-listing earlier this year. Market participants have questioned whether the current design and operational steps of SPOS allow a small set of orders to influence the discovered price. SEBI’s stated objective is to refine the mechanism so it is more transparent, efficient, and investor-friendly.

Dummy price bands: retain, but make them consistent

SEBI intends to continue dummy price bands as a risk-management tool to prevent “fat finger” errors. At the same time, it is expected to revise the framework to make it more consistent and less restrictive. This balance is important because dummy bands can reduce error-driven volatility, but they can also constrain genuine price discovery if the bands are too tight or adjusted unevenly.

In practice, dummy price bands set a permitted range within which orders can be placed during SPOS. When these bands do not reflect market interest, they can restrict participation and lead to a discovered price that does not represent broader demand and supply. SEBI’s review is aimed at making this process less prone to distortions, without removing risk controls altogether.

Uniform flexing of dummy bands across exchanges

One of the central proposals is to make the mechanism for flexing dummy price bands during SPOS uniform across exchanges. Flexing refers to widening the dummy price bands during the session to allow for more accurate price discovery. A consistent approach across venues is expected to reduce confusion and limit the impact of differing operational practices.

SEBI is also considering applying dummy band flexing dynamically when necessary. The current system allows flexing only up to a minute before the random closure period, which can limit responsiveness if order flow changes late in the session. A more flexible, standardised approach is intended to bring the discovered price closer to where genuine trading interest exists.

Automation to reduce manual coordination

SEBI has consulted exchanges and other stakeholders and is working on a consultation paper on these changes. Feedback discussions have included whether the current manual coordination between exchanges for flexing price bands should be replaced with an automated mechanism. According to the context shared, SEBI wants this to be done through an automated route with no exchange intervention.

The intent is to reduce delays and inconsistencies in how and when relaxation is applied. A rules-based, automated approach can also improve auditability, since each adjustment would follow a defined framework rather than discretionary coordination. SEBI’s proposals have reportedly received initial approval from industry stakeholders and will be considered internally before the consultation paper is released.

Re-examining the 9:35 am cut-off for relaxation

Another point under discussion is whether the rule that prevents any relaxation after 9:35 am should be reconsidered. This cut-off can be critical on listing days or re-listings, when the order book may evolve quickly in the early minutes. If bands cannot be relaxed after a certain time, price discovery may be forced to settle within constraints that do not reflect actual demand and supply.

SEBI’s review indicates it is open to adjusting such constraints if they are contributing to distorted outcomes. The regulator’s framing remains investor-protection focused, especially around “artificial listing day traps” and potential price rigging. Any final change is expected to come after public consultation.

Minimum participation: PAN-based trader threshold

To further bolster price discovery, SEBI is considering treating an SPOS session as successful only if the discovered price is based on orders from at least five Permanent Account Number (PAN)-based traders. Another articulation of the proposal mentions at least five unique buyers and sellers as the basis for considering the session successful. The common aim is to ensure the discovered price is not set by a very small set of participants.

This is meant to widen participation and improve confidence that the price reflects broader market interest. A participation threshold can reduce the risk of outcomes driven by a limited number of trades. It also aligns with SEBI’s stated goal of protecting retail investors from distorted price discovery.

Base price methodology: closer to present value

SEBI is also reviewing how base prices are derived for SPOS, especially for re-listed shares. At present, stock exchanges use the lower-end of the book-value estimate for price discovery, and there is also a discussion point on whether base price should be linked to the lower of book value and face value. SEBI is seeking to bring the discovered price more in line with the book value of the stock.

The regulator is considering revising the base price methodology to reflect the present value of a scrip more accurately, potentially leaning more heavily on book value. This is part of a wider attempt to reduce valuation anomalies that can occur when a security returns to trading after insolvency resolution. The details of the final approach will depend on how SEBI formalises the framework post consultation.

What happens if price discovery fails on day one

SEBI is considering incorporating elements from the special call auction framework used for investment companies. One proposal states that if price discovery fails on the first day, the session would continue to the next trading day until a realistic price is established. This is intended to prevent outcomes that are based on too few trades or weak participation.

By allowing continuation, the mechanism aims to avoid forcing a potentially unrealistic price into regular trading. It also gives the market more time to place orders within a structured framework. This approach, if adopted, would make price discovery a process rather than a single short window outcome.

Key proposals at a glance

Market impact and what investors should watch

SEBI’s review targets an area that affects both IPO listings and securities returning to trade. If SPOS outcomes are more representative and harder to influence, retail investors may face fewer situations where listing-day prices appear disconnected from broad demand and supply. Uniform flexing across exchanges and automation can also reduce operational uncertainty.

For companies and intermediaries, tighter process standards can change how listing-day order books form and how quickly a stable price is discovered. And for re-listed securities emerging from insolvency, revisiting base price methodology and participation thresholds may improve confidence in the first traded price.

Conclusion

SEBI’s proposed overhaul of SPOS and dummy price band practices signals a push to make listing-day price discovery more transparent and less prone to distortion. The regulator has already consulted exchanges and stakeholders, and the proposals are expected to be taken forward through a consultation paper before final implementation. Investors will be watching for the final framework, especially on uniform band flexing, participation thresholds, and base price methodology.