SEBI Tightens Pre-IPO Call Auction Rules to Curb Price Manipulation

The Securities and Exchange Board of India (SEBI), the nation’s stock market regulator, has announced stricter measures to combat potential manipulation during the pre-IPO call auction process.

Combating False Demand and Supply

SEBI identified instances where large orders were placed at inflated prices during the pre-IPO call auction. However, a significant portion of these orders were subsequently cancelled just before the session closed. This practice created an illusion of high demand, potentially leading to an artificially inflated opening price for the stock on listing day.

Introducing Random Closure and Enhanced Monitoring

To address this manipulation tactic, Sebi has implemented a system-driven random closure mechanism for the pre-IPO call auction session. This means the session will now close at any point within the last ten minutes of the order entry window, effectively between the 35th and 45th minute. This unpredictability discourages strategic order cancellation near the closing window.

Furthermore, SEBI has mandated stricter monitoring by stock exchanges. Exchanges will now be required to generate alerts for clients who exhibit suspicious cancellation patterns. These alerts will trigger if a client cancels orders exceeding 5% of the total session cancellations or cancels more than half of their own placed orders. Exchanges may also request explanations for such cancellations or order price modifications.

Transparency Through Real-Time Data

To promote transparency, SEBI has directed stock exchanges to make real-time pre-IPO call auction bid data publicly available on their websites. This allows investors to make informed decisions based on accurate market dynamics.

Phased Pre-IPO Call Auction Process

For clarity, here’s a breakdown of the pre-IPO call auction process:

• Open Order Placement (9:00 AM – 9:45 AM): During this 45-minute window, investors can place, modify, or cancel orders, but no trades are executed.
• Order Matching and Execution (9:45 AM – 9:55 AM): Orders are matched based on supply and demand to determine the equilibrium price, which becomes the opening price on the listing day.
• Buffer Period (9:55 AM – 10:00 AM): This five-minute window allows for a smooth transition from the pre-IPO call auction to regular trading.

Implementation Timeline

These new regulations will come into effect after a 3-month grace period.

Addressing Listing Day Volatility

Before implementing the pre-IPO call auction system, share prices on listing day often experienced significant fluctuations. The call auction process was introduced to establish a more stable and predictable opening price based on genuine market demand.

Conclusion

SEBI’s revised pre-IPO call auction regulations aim to create a fairer and more transparent listing environment for investors. By eliminating potential manipulation tactics and enhancing market monitoring, SEBI seeks to foster a market that reflects genuine investor sentiment.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.