SEBI introduces new measures to curb IPO pricing manipulation

Securities and Exchange Board of India (Sebi) introduced new surveillance measures for stock exchanges to prevent the misuse of the pre-open call auction session during initial public offerings (IPOs).

This session will now last for 60 minutes, starting at 9 am. It includes 45 minutes for order entry, modification, and cancellation, 10 minutes for order matching and trade confirmation, and a 5-minute buffer to transition to the regular trading session.

IPO price discovery

To enhance price discovery based on supply and demand, the session will close randomly within the last ten minutes of the order entry period, between the 35th and 45th minute. This closure will be system-driven, as per Sebi’s circular.

Sebi noted that some IPO and relisted stock call auction sessions have seen large orders placed at inflated prices, with many canceled just before the session's end. This activity could create misleading demand and supply signals, potentially manipulating stock prices to the detriment of retail investors.

To address these issues, stock exchanges are instructed to implement robust surveillance mechanisms during the pre-open call auction sessions. Alerts will be generated based on specific criteria, such as significant price modifications from previously placed orders, a client’s canceled order quantity exceeding 5% of the market's total, and the value of a client's canceled orders exceeding 5% of the total market value.

These alerts must be reported to Sebi by the end of the day. Exchanges will also analyze these alerts and seek explanations from clients for significant cancellations or modifications.

To promote transparency, the number and quantity of canceled orders will be displayed in real-time on the stock exchange’s website and trading terminals. This will enable investors to make more informed decisions regarding stock pricing.

This framework will come into effect 90 days from the issuance of the circular.

Also watch: Stock exchanges launch same day transaction settlement beta version from today