SEBI Consultation Paper Targets Price Divergence in Illiquid Shares

The Securities and Exchange Board of India (SEBI) on Thursday proposed a new mechanism to standardise the determination of base prices used in pre-open call auctions and price bands for stocks listed on multiple stock exchanges.

The proposal aims to address the issue of price divergence that arises when certain stocks continue trading on one exchange while remaining inactive on another.

Why the Change is Needed

In a consultation paper, SEBI said it had observed instances involving illiquid stocks, where the absence of trading activity on one exchange, coupled with continued trading on another, resulted in significant differences in closing prices.

The regulator noted that such discrepancies can affect:

• Price discovery,
• Market efficiency,
• Investor confidence, and
• The effectiveness of pre-open auction mechanisms.

Current System

At present, stock exchanges determine scrip-wise price bands independently, based on the previous day’s closing price recorded on their respective platforms.

This means that if a stock does not trade on one exchange but records price movements on another, the next day’s:

• Base price for pre-open auctions, and
• Applicable price bands

may differ across exchanges.

SEBI stated that this independent approach has, in certain cases, led to substantial variations in prices for the same security.

Proposed Harmonisation Framework

Under the proposed mechanism, exchanges would adopt a uniform methodology for determining:

• The base price for pre-open call auctions, and
• Daily price bands for stocks listed on multiple exchanges.

The objective is to ensure that investors receive a more consistent and transparent trading experience irrespective of the exchange through which they trade.

Expected Benefits

According to market experts, the proposed framework could offer several advantages:

• Improved Price Discovery: A common reference price may lead to more efficient valuation of securities.
• Reduced Arbitrage Opportunities: Minimising exchange-wise price discrepancies could prevent unintended arbitrage.
• Enhanced Market Integrity: Uniformity across exchanges can strengthen investor trust.
• Better Investor Protection: Retail investors would be less exposed to confusion arising from varying price limits.
• Operational Consistency: Exchanges can maintain synchronised trading parameters for the same stock.

Consultation Process

The proposal has been released as part of SEBI’s public consultation exercise, allowing stakeholders—including stock exchanges, brokers, institutional investors, and market participants—to submit their comments and suggestions before the framework is finalised.

The regulator frequently uses consultation papers to seek industry feedback and ensure that new rules reflect practical market considerations.

Strengthening Market Efficiency

The latest proposal underscores SEBI’s ongoing efforts to enhance transparency and improve the functioning of India’s capital markets.

By addressing anomalies in price determination for multi-listed securities, the regulator aims to create a more robust and fair trading ecosystem that benefits all categories of investors.

If implemented, the harmonised pricing mechanism could become an important reform in India’s equity market structure, particularly for less-liquid stocks where price divergence is more pronounced.