Markets regulator SEBI introduced additional surveillance measures for stock exchanges to prevent the misuse of the pre-open call auction session for initial public offerings (IPOs). According to the new measures: the session will last for 60 minutes, starting at 9 am. Out of this, 45 minutes will be allotted for order entry, modification, and cancellation, 10 minutes for order matching and trade confirmation, and the remaining 5 minutes will serve as a buffer period to transition from the pre-open session to normal trading. The session will close randomly during the last ten minutes of order entry, between the 35th and 45th minutes, driven by the system.
This is a way to determine the opening price based on the combined supply and demand for the underlying stocks on the first day of trading. Stock exchanges have been instructed to have sufficient surveillance mechanisms for the pre-open call auction sessions for IPOs to prevent any manipulation.
SEBI observed that during the call auction in the pre-open session for certain IPOs and relisted scrips, orders were placed at higher prices in large volumes, and a significant portion of these orders were canceled just before the session closed. This activity may have created false demand and supply, potentially manipulating the price of the scrips to the detriment of common investors.
In addition to surveillance mechanisms, stock exchanges are required to generate alerts based on certain indicative parameters. These include significant price modifications from previously placed orders, canceled quantity for a particular client exceeding 5% of the total canceled quantity across the market during the pre-open session, and the value of canceled quantity for a particular client exceeding 5% of the total value of canceled quantity.
For the alerts based on these parameters, stock exchanges are to provide a report to SEBI by the end of the day. They will also seek explanations from clients for any cancellations or modifications during the pre-open session, based on their analysis. To enhance transparency, details of the number and quantity of canceled orders will be displayed on the stock exchange’s website and trading members’ terminals on a real-time basis for investors to make informed decisions on the pricing of such stocks.
The framework will come into effect 90 days after the issuance of the circular.