SEBI Proposes Reforms to Improve Price Discovery in Pre-Open Auctions

Summary: The article examines structural issues in the pre-open call auction mechanism used for IPOs and re-listed securities and analyses reforms proposed in SEBI’s May 2026 consultation paper. It argues that obsolete base-price anchors and rigid dummy operating ranges can suppress price formation during the auction and cause deferred demand to emerge during continuous trading, potentially resulting in repeated upper-circuit movements. For re-listed scrips, the proposed framework would use recent closing prices or independent valuations to determine the base price, while dummy price bands would continue as a risk-control mechanism with incremental and participation-based flexing. successful price discovery would also require minimum participation by unique PAN buyers and sellers. The article supplements SEBI’s proposals with recommendations for greater transparency, periodic regulatory review, post-auction performance tracking, independent audits of valuation reports, current financial information and pre-auction information memoranda. It considers the potential impact of these changes on order rejection, equilibrium-price formation, credibility of opening prices, surveillance resources and the return of long-suspended companies to trading. The article concludes that recalibrating the auction architecture could move price discovery back into the pre-open session, reduce structural distortions during continuous trading and allow regulatory resources to focus more effectively on genuine market-abuse concerns.

When Risk Controls Distort Price Discovery: An Analysis of SEBI’s Consultation Paper on Pre-Open Auctions for IPOs and Re-Listed Scrips

Abstract

Pre-open call auctions are created with the purpose of enabling orderly price discovery prior to routine trading; however, the current structure of on-call auctions may actually be providing negative results. The goal of this research is to study and evaluate how or why the interaction of obsolete base-price anchor models and rigid dummy price bands has been suppressing auction-stage price formation to such an extent that the backlog of deferred demand is re-emerging in continuous trading; on the flip side, this is causing multiple hits to the upper circuit breaker on consecutive days of trading.

To that end, instrument-finish structure friction that some of the characteristics of the current structure exhibit was identified, including base price anchoring to arbitrary book or face values, resulting in truncated rational buy orders; fixed percentage increases in band expansion were inadequate as bridgeway solutions to allow rational prices to be achieved across the auctions. This study then evaluated different proposals for reform made by the SEBI May 2026 consultation paper, primarily in relation to the new base-price determination framework and participation-flexible mechanisms. Supplementary recommendations are considered which would incorporate enhanced transparency; post- auction performance measurement; independent valuation audits; and required pre-auction information dissemination.

The core argument asserts that there is a structural artefact produced by auctions; and that such “speculative behaviour” can be mitigated by updating the existing structure, thereby restoring the integrity of price discovery and simultaneously reducing the regulatory burden on market participants and surveillance authorities.

Keywords: Pre-Open Call Auction; Price Discovery; Dummy Price Bands; Base Price Anchoring; Re-Listed Scrips; SEBI Consultation Paper; Secondary Market Advisory Committee (SMAC)

Introduction

A notable pattern has developed in recent years among the previously suspended or re-listed securities of the Indian capital markets, which have undergone extended periods of suspension and then resumed trading. The price at which they open on the day they reopen is typically only a modest level as determined by pre-open call auction pricing, but once regular (continuous) trading begins, they are subject to substantial buying pressure causing the price to immediately reach the upper circuit limit, often over consecutive trading days triggering additional surveillance measures from the market regulator (SEBI), thereby drawing increased regulatory scrutiny.

Although this may appear to be a speculative frenzy at first glance, it appears that it may actually be indicative of a pricing phenomenon called delayed price discovery generated by the very process developed to assist in utilising their orderly functioning in the marketplace (i.e. through the continuous trading auction process). In other words, the auction process, in theory, should allow or assist in the rational determination of equilibrium prices; however, it is possible that the auction architecture may be systematically preventing this rational formation during the 60-minute price discovery period while maintaining an unregulated volatility in the continuous trading of such securities.

Consequently, as a result of this emerging pattern, SEBI issued a consultation paper regarding the determination of price distributions during the price discovery process for IPOs and re-listed securities on the Pre-open Call Auction Session in May 2026^[1]; clearly indicating their concern regarding controls intended to prevent disorder from causing price bands and conservative base price anti-capping during the auction, causing them to be capped at their equilibrium price, thereby displacing volatility into the continuous trading of such securities.

The Present Architecture

Before the regular market opens, one-hour“pre-open call auctions” occur. This follows a defined sequence: order input, random closure of bid and ask, and finally, determining the equilibrium (or clearing) price at the end of the auction on the basis of the maximum quantity of orders able to be filled.

While there is no “price band” that exists during the pre-call auction, there are “dummy operating ranges” for risk mitigation purposes set by the exchanges. Anything that falls outside these ranges will be frozen and ultimately cancelled. Dummy operating ranges around the base price are mirrored as percentages.

For IPOs, the base price will be equal to the issue price as established at book-building. For the re-listing of a security, the determination of the base will be less clear-cut. The time the security has been suspended can have an effect on the base determination. Generally, after being suspended for a long period, the base price will be determined as the lower of the book or face value, which will frequently result in the base price of ₹10, regardless of the company’s economic condition.

The initial dummy bands established will differ depending on category. For re-listed companies, typically, the downside band is wider than upside; therefore, common configurations would have a band from -85% to +50% from the base price. Flexing will occur when any indicative equilibrium approaches the edge of the dummy bands, and the bands will be expanded by 10%.

If equilibrium isn’t discovered, re-listed scrips continue in call auction mode on subsequent days.

Structural Frictions in the Current Design

The core structural challenge is the interplay between base-price anchoring and the use of dummy price bands. The base price may be anchored to book or face value at the point of relisting when it was previously suspended for some length of time, but in the absence of a significant number of value-adding events during that time, it loses any relationship with current economic value. As an example, there could have been numerous value-creating events between suspension and re-listing, such as a major restructuring of the issuing company or a revaluation of the issuing company’s assets, a demerger of part of the issuing company and then the issuing company being re-rated by peers based on its earnings trajectory, in addition to any changes in regulation that impact the issuing company.

Anchoring at ₹10 creates an arbitrary reference point, and therefore does not reflect the last trade nor the contemporary valuation of the stock. Because dummy price bands are expressed as a percentage around that base, the range of values that may be considered is severely limited by the absolute price cap. For example, if the upper limit of the dummy price band is 50% of the base price (i.e., 50% of ₹10 = ₹15), and the actual intrinsic value of the stock falls within a range (e.g., between ₹50 and ₹100), then most of the rational buy orders that would be placed in the market at that time would not pass through the dummy price band, thereby impacting the overall supply of stock available for purchase.

The exact case noted in the consultation paper is an example of the demand curve being fundamentally truncated, where 90% of the buy orders received during the re-issue auction were rejected. In terms of prices discovered through the auction process, the auction could not discover the true equilibrium price but would have found the maximum level allowed under the bidding procedures.

As continuous trading is established, dormant demand, which had previously been declined, reasserts itself within the market. Investors whose orders were rejected by the exchange will now enter the market with either market or aggressive limit orders. Immediately, this creates buying pressure overwhelming supply. The stock will hit the top of the trading limits (circuit breaker) in a matter of minutes or will continue doing so for a number of days after. This process has moved the volatility out of the functional auction marketplace and into continuous trading; therefore, creating price discovery fragmentation on a day-to-day basis.

This fragmentation strictly by time has multiple costs associated with it. Investors’ liquidity is reduced during very important initial time periods of trading. Investors of long-term will not be able to acquire a fair value for their long-term positions. The initial undesired or depressed price of a stock will produce a whipsaw to the upside, and cause a lot of complications when determining the appropriate pricing for derivatives, and ample regulatory investigations will be utilised to investigate instances of manipulation resulting from what are structural artefacts.

Incremental flexing introduces another source of friction. The bands, which may be expanded due to the approach to indicative equilibrium, are based on fixed 10% increments when they may lag significantly behind genuine valuation gaps. If an actual equilibrium is 200% above base but the flexing is done in 10% increments, then there will need to be twenty consecutive events before reaching this equilibrium in the auction mechanism and this process will not allow for a dynamic adaptive mechanism, but will instead create a step mechanism that only reacts.

Strengthening the Structure: Additional Enhancements

PART A: REGULATORY PROPOSALS FROM SEBI’S CONSULTATION PAPER

Based on SEBI’s consultation paper and recommendations from the Secondary Market Advisory Committee (SMAC), several basic reforms have been proposed to fix structural problems in the current call auction system.

Base Price Determination Framework:

For re-listed scrips revoked within 6 months of suspension, a three-step approach would set the base price. The first option is to use the latest closing price (not older than 6 months) on the same exchange. If that is not available, the second option is to use the latest closing price on other exchanges. If neither exists, the third option is to use the lower of two independent valuation certificates (not older than 3 months) from two-Independent Chartered Accountants or Valuation Agencies. For scrips suspended beyond 6 months, the base price would come from the lower of two independent professional valuations. Exchanges could create a panel of qualified valuers and use standard valuation methods to ensure consistency.

Enhanced Dummy Price Band Approach:

The dummy price band system would continue to be used as a safety measure for initial public offers (IPOs), all small and medium enterprise (SME) IPOs and shares that are re-listed on the stock exchange. If the indicative equilibrium price comes within 10% of either of the price bands, the band would be automatically increased by 10% and communicated to all stock exchanges affected. In case of any situation where orders accumulate only on one side, participation-based flexing would be used. In case there are only either upper or lower band orders, a 10% increase would happen only after confirmation of availability of at least 5 participants with unique PAN in collaboration at that price level. Moreover, price bands would always and actively be utilised during the whole trading session, including the period of random closure that is also prohibited now.

Requirements for successful price discovery:

The successful price discovery starts only when the number of unique PAN buyers and sellers taking part is equal to at least 5. In cases when transactions have failed for re-listed stocks the system continues acting successively on the following trading days until the price is discovered.

PART B: ADDITIONAL SUGGESTIONS – IMPROVED PROPOSALS

Additional enhancements can be made beyond the recommendations provided by SEBI’s consultation paper, tackling some of the grave issues pertinent to the efficacy and quality of information in auctions.

Transparency Framework:

Analytical insights are key to tracking auction effectiveness on a quarterly basis. Metrics can be determined, such as rejections of orders, duration that bands were at extreme points, expansions of bands, behaviour of opening bids in terms of their relation to the base price, and perhaps most importantly, auction prices in relation to the VWAP for the first hour involved in trading and auctioning.

Adaptive Regulatory Evolution:

It is essential that within every period of two to three years stakeholders meet additionally and evaluate regulations in order to prevent them from becoming obsolete. For instance, widening the band, expanding it in steps, and agreeing upon the limit for the number of participants should be based on actual data available rather than on assumptions made during the framework’s setup. The benefits of having any data to make adaptive changes would allow the market to evolve without any hindrance.

Post-Auction Performance Tracking and Disclosure:

SEBI should establish a common database whereby there would be indicated auction-discovered price as well as daily closing prices for each re-listed script at day 1, day 7, day 30, and day 90 of continuous trading. The historical data obtained from the database should help future auction participants to gain an understanding of the possible performance of the auction system under the same conditions.

Independent Auditing of Valuation Quality:

The valuation reports that were used for the determination of base prices could be subject to third-party assessment by SEBI-empaneled assessors randomly. Out of the chosen value sample, 20 – 30% could undergo audits in terms of the methodology used, assumptions made, and calculations performed. Valuers whose reports repeatedly fail quality audits could be debarred from the empanelled list. This creates quality discipline in the valuation profession for this specific purpose.

Minimum Information Age Requirements:

All companies that have been inactive for extended periods of time must have their valuations established by using current financial information that is less than six months old. As an example, the valuation of a company that was suspended for three years would still use financial statements from more than three years ago to establish the base price rather than current financials. If it were required that the company’s financial statements were either recently audited or management certified, then the valuations would be based on current economic conditions and not on outdated financial conditions. If the company cannot provide current financial statements, then the auction will need to be put on hold until the current financial statements can be provided by the company.

Pre-Auction Information Dissemination:

Companies that are going to be re-listed shall be required to publish a complete information memorandum prior to an auction of the company. This memorandum shall contain updated financial statements, discussion of management concerning the reasons for the suspension, information regarding debt restructuring, if any, any changes in the ownership pattern of the company and any other material developments. The lack of information (that the investor had prior to the suspension) can be a problem for many investors entering into the auction. Therefore, requiring a period of mandatory disclosure will allow investors to use real data and information to guide their decisions during the auction process, rather than having the potential to make blind orders.

Predicted Market Impact of a Realigned Framework

Price discovery efficiency during IPOs and re-listed securities would be greatly enhanced with a recalibrated pre-open call auction framework based on SEBI’s consultation proposals.

Reduced Order Rejection and Effective Demand Capture:

The immediate measurable impact would be a sharp drop in order rejection rates. SEBI’s consultation paper cites instances where up to 90% of buy orders are rejected during re-issue auctions because they fall outside the rigid dummy bands based on outdated base prices. Instead, the proposed framework would base band levels on valuation with overly rigid bands that would mechanically extract genuine market demand from auctions, while in reality, the level of market demand may have been higher. The rejection rates would decrease, but would not go down to zero so that the auction could perform its very objective of setting equilibrium prices.

Improved Price Discovery During Auction Window:

The valuation-anchored base price ensures that auction reference points are indicative of the market state rather than just above their obsolete book values. The proposed three-step framework puts recent closing prices, followed by prices from other exchanges and lastly independent valuation certificates, which systematically transition reference pricing from market-based towards appraisal-based. This, combined with dummy bands that adjust on their own beginning when the indicative equilibrium price strays close to the edges of the bands, permits a 60-minute auction to more closely approximate true equilibrium.

Price Signals Will Have Increased Credibility and Provide Additional Information:

Price signals produced under a reformed auction process will have significantly more informational value. When an orderly auction occurs that allows widespread participation, the price discovered is credible. In this instance, when an orderly auction process that allows widespread participation produces an equilibrium price, in contrast, the closing price for the day from multi-day manual circuit limit trading (with each day’s closing price having been created by the mechanical limitations of the system rather than the actual supply/demand constraints of the marketplace) provides very limited informational value. This proposed framework will reinstate the credibility of opening prices, which in turn will lead to more accurate pricing of derivatives, indices, and portfolio benchmarking.

Regulatory Resources Will Be Allocated More Efficiently:

With less structural distortion present in the marketplace, SEBI and exchange surveillance teams will be able to allocate their resources toward the detection of legitimate market abuse rather than expending resources on price patterns that may superficially appear to be manipulated. The number of times that immediate upper circuit breakers will be initiated as a result of suppressed auction prices will thus reduce and, as such, will streamline regulated market participants’ compliance burden and increase regulatory effectiveness.

Companies that have been suspended from trading and want to return to the market will benefit from this framework as it provides a clear path to do so. When the price at which these companies begin trading is based on their most recent closing price, or on an independent valuation of the company, this allows for a more orderly price discovery process. This also helps to reduce the cascading effects on the price that long-suspended companies experience when they first start trading.

To ensure that the framework operates effectively, there are some basic requirements that must be met, such as the quality of the valuations that are used, the ability of exchanges to coordinate with one another, and the ability of the overall market to adapt to the new structure. Transitions may include increased levels of volatility while participants migrate to strategies based on the new trading structure; in these cases, the regulatory authorities may need to exercise discretion in allowing for the transition process to take place.

Conclusion

The current auction process used to pre-open re-listed shares creates more issues for the market than it resolves. What are perceived to be speculative trades are a byproduct of poor auction design that limits downward pricing forced by prior to the open trading (aka pre-opening) and therefore will benefit from changes made to the auction to allow open price discovery in line with the values of stocks.

If these proposed changes are made, they will accomplish what the auction was always designed to do – to create an orderly process for determining a fair opening price(s) for stocks based on their real values over the course of the full 60-minute pre-open and allow for elimination of destructive levels of volatility from the multi-day trading environment into the auction environment where they belong, and reduce the amount of triggering of surveillance and regulatory requirements and the number of circuit hits by stock on opening.

SEBI should act quickly to implement these recommendations. They provide the appropriate blend of investor and market efficiency while providing an accurate and appropriate reflection of the real economy by eliminating the structural impediments currently preventing accurate assessments of real value being determined consistently.

******

[1]SEBI, Consultation Paper on Review of Price Discovery Mechanism through Pre-open Call Auction Session for IPO and Re-listed Scrips (May 21, 2026; last visited on May 29, 2026).