The Securities and Exchange Board of India on Tuesday came out with a circular to ensure that the listing price of IPO stocks is within a stipulated range at different exchanges. As some of the stocks are listed with huge price differences between exchanges, the regulator asked exchanges to compute an equilibrium price on listing.
Currently, call auction sessions are conducted on stock exchanges to determine the ‘discovered’ or equilibrium price of an IPO.
What is equilibrium price?
In general terms, an equilibrium price is the price at which the total demand matches the total supply.
Why do we need a Common equilibrium price (CEP)?
The huge variation in equilibrium or discovered price among the exchanges distorts the actual discovery of IPO stock price and confuses investors. So, SEBI has asked the exchanges to arrive at an average equilibrium price.
How is CEP calculated?
Let’s take an example where two exchanges list the stock of a company post successful Initial Public Offering (IPO). If BSE’s equilibrium price is at ₹120 each for 300 shares and the NSE’s is at ₹100 each for 500 shares, the CEP will be the average of the two. [(120*300+100*500)/800 = ₹107.50]
Further, the lower and upper price band on both exchanges would be 5 per cent around the CEP (₹107.50). So, the CEP would be the volume-weighted average of equilibrium prices on individual exchanges as determined by the call auction.
Is CEP applicable for listing of all IPOs?
No, it will not be applicable to all listing. According to SEBI, CEP should be computed only if the difference in the equilibrium price among the exchanges is more than the applicable price band for the scrip; and the pre-opening session is conducted on multiple stock exchanges.
From when will the order come into effect?
It will come into effect from around mid-June.
How will it help investors?
The current call auction method gives different prices for the IPO in different exchanges. “If the difference in these discovered prices is significant, there could be a situation wherein price bands on individual exchanges are far apart from each other, giving an incorrect picture of price band to investors,” SEBI said in its statement.
Hence, the uniform CEP will help the investors to determine the actual price of the stocks, avoiding any inflated or deflated valuation.
Amit Pamnani, Chief Investment Officer at Swastika Investment Ltd, said, “It is introduced to avoid the situation wherein price bands on individual exchanges are far apart from each other, giving an incorrect picture of the price band to investors. The new regulation is expected to streamline the IPO listing process and reduce discrepancies in listing prices between exchanges.”