The Securities and Exchange Board of India (Sebi) has proposed tweaks to pre-open call auction sessions for initial public offerings (IPOs). India’s stock market regulator wants rules relaxed for the time window in which an exchange is fed with data on ‘buy’ and ‘sell’ orders for a price to arise that balances demand with supply.
An IPO’s ‘dummy price band’ around its issue price is designed to keep out distortively over- or underpriced bids, but since stiff limits could cap a debut share’s price below its fair equilibrium, a key Sebi proposal seeks to stretch them in automatic 10% jumps if at least five unique-PAN traders bid beyond the band.
To the extent greater band elasticity spells smoother price discovery, the broad idea is welcome. Market efficiency is about keeping authentic trades in synchrony. However, since price rigging also gets easier the fewer traders it takes to shift circuit limits, the five-trader condition may need a rethink.
Perhaps it should take a rising multiple of traders for each band extension: five once, 25 the next. Startups no longer need a track record of profit to raise public funds. And without price-earning ratios, it’s harder for investors to tell future value apart from asset inflation.