The Securities and Exchange Board of India has begun initial talks with stock exchanges and other market participants to review the framework for price discovery in IPOs and re-listed shares after concerns were raised over price discovery of Swan Defence’s re-listing earlier this year.
At the centre of the debate is the use of dummy price bands during special pre-open sessions, which some investors say undermines fairness. Sebi’s focus, according to people familiar with the matter, is to assess whether structural changes are needed to make the process more transparent, efficient and capable of restoring confidence, especially in cases of re-listed securities emerging from insolvency.
People familiar with the matter told Monecontrol that the regulator has begun consultations with stock exchanges, brokers and other market participants to decide if the current mechanism needs a structural change. Sebi’s focus is to ensure that price discovery in re-listed securities, including those emerging from insolvency resolution, is transparent, efficient and capable of restoring investor confidence.
Details of the Proposal
Among the issues under discussion are - whether the dummy price band system should be redesigned to allow greater participation in the special pre-open session (SPOS), if the current manual coordination between exchanges for flexing price bands should be replaced with an automated mechanism, and whether the rule that prevents any relaxation after 9:35 am should be reconsidered. Another key question is whether the base price for re-listed shares should continue to be linked to the lower of book value and face value, or reflect a more accurate measure of present value.
Why Review the Existing Mechanism?
The dispute began after Swan Defence’s shares were re-listed on the BSE and NSE following approval of its resolution plan. During the special pre-open session (SPOS), the exchanges imposed what was described as a dynamic or dummy price band of minus 85 percent to plus 50 percent on the stock. Within this range, the price discovery process led to an equilibrium price of Rs 35.99 on the BSE, which was automatically carried forward as the opening price on the NSE.
According to notes seen by Moneycontrol, the company strongly objected to this outcome, pointing out that the discovered price was far below its book value of Rs 1,578.48 per share as per March 2024 financials, stating that this eroded shareholder wealth and damaged investor confidence.
In its representation to the regulator, Swan Defence argued that imposing dummy price bands violated Sebi’s January 2012 circular, which clearly specifies that no price bands should apply to re-listed securities during such sessions. The company claimed that this artificial suppression of price caused financial losses to shareholders, created challenges in meeting minimum public shareholding requirements and lowered the stock’s valuations far below its peers.
The company further requested the regulator and exchanges to “declare the trades executed on January 20, 2025, as null and void, owing to unforeseen and unjustified constraints imposed during the pre-open call auction.”
What Exchanges Have to Say
In a note seen by Moneycontrol, the exchanges defended their approach, explaining that dummy price bands have been part of the framework since 2012 to prevent fat-finger errors. Since August 2021, the operating band for re-listed shares has been uniformly set at minus 85 percent to plus 50 percent, with the option to relax it in increments of 10 percent after mutual consultation.
In this case, they said, the price band was flexed up to 260 percent before price discovery settled at Rs 35.99 on the BSE and Rs 36 on the NSE. Thereafter, the security was moved to the normal market. The exchanges also pointed out that the base price was correctly taken as Rs 10, the face value of the share, in line with existing rules that require adoption of the lower between face value and book value.
Sebi’s Early Observations
According to sources, Sebi acknowledged in its preliminary observations that dummy filters were introduced as safeguards against volatility, but admitted the system has shortcomings. The regulator noted that the discovered price was based on just 14 trades from eight unique orders, with nearly 90 percent of buy orders on the BSE rejected as they fell outside the allowed band. This raised doubts about whether the process truly reflected a fair market value.
Swan Defence has highlighted that since re-listing, its stock has consistently hit the 5 percent upper circuit on every trading day and has been placed under additional surveillance measures, a trend it attributes to distorted price discovery on the first day.
Also Read: Sebi proposes less stake dilution, more timeline for public shareholding compliance for large IPOs
Expert View
Moneycontrol spoke to domain experts who understand Sebi’s regulations and exchange operations, one of whom said, “It is a complex issue. It will be difficult for exchanges and Sebi to tweak any law retrospectively. If any change is made, it can only be prospective.”
Another expert cautioned, “So many companies have relisted post resolution plan, changing the framework for one entity retrospectively may raise serious questions. If exchanges and Sebi consider such requests, they may face a flurry of similar demands from previously re-listed companies.”
Experts, however, agreed that there is scope to tweak the framework prospectively, so that companies emerging from resolution can re-enter the market with fairer valuations and raise funds more effectively.
An email seeking comments from Sebi did not elicit any response. Comments could not be sought immediately from Swan Defence.
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