IPO pricing

IPO pricing

Subject : Economy

Section: Capital market

• The Securities and Exchange Board of India (SEBI) on Tuesday asked stock exchanges to set a “common equilibrium price” for stocks on the first day of the listing post the IPO in order to remove any ambiguity over price discovery.
• Currently, the price discovery for shares happens through a call auction process.
• Call auction session would continue to be conducted separately on individual exchanges and orders would be matched by respective exchanges after computation of equilibrium price
• CEP will be a volume-weighted average of equilibrium prices on individual exchanges as determined by the call auction. The exchanges will set the aforesaid CEP in their trading systems and apply uniform price bands based on the CEP. Further, only unexecuted pending orders from call auction sessions within the price band will be carried forward to the normal market segment. The provisions of this circular will come into effect after 60 days from the date of issuance.

Why change?

SEBI has asked exchanges to put in place systems for implementation of the circular, including necessary amendments to the relevant bye-laws, rules, and regulations. SEBI has also asked stock exchanges to communicate the status of the implementation of the provisions of this circular in the monthly development report.

The call auction mechanism for IPOs was started by SEBI in January 2012. According to SEBI, since call auction sessions are conducted on multiple stock exchanges, the discovered price or equilibrium price pursuant to such call auction sessions could be different on each exchange.

IPO

• IPO is the selling of securities to the public in the primary market.
• Primary market deals with new securities being issued for the first time. It is also known as the new issues market.
• It is different from secondary market where existing securities are bought and sold. It is also known as the stock market or stock exchange.
• It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public.
• It is generally used by new and medium-sized firms that are looking for funds to grow and expand their business.