The Securities and Exchange Board of India has released a consultation paper proposing a harmonised mechanism for fixing price bands and pre-open base prices for stocks listed on multiple exchanges, seeking to address the risk of price divergence that can arise when a stock trades on one exchange but not another.
The market regulator has flagged that the existing practice of exchanges independently setting price bands can lead to significant divergence in stock prices across platforms, particularly in illiquid stocks where trading may happen on one exchange but not another on a given day. When a stock does not trade on an exchange, that exchange currently has no updated closing price to work with, which can result in the next day’s price band being anchored to a stale reference point while another exchange reflects a more current valuation.
The consultation paper lays out a common reference price framework designed to ensure uniform price discovery across exchanges. The key proposals are as follows.
Where a stock trades on only one exchange on a given day, all other exchanges where it is listed would use that exchange’s closing price to set the price band for the following trading session. The same principle would apply to the pre-open call auction base price, with non-traded exchanges adopting the closing price from the exchange where trading actually took place.
For stocks that trade on multiple exchanges but not all of them, the non-traded exchanges would use the closing price from whichever traded exchange recorded the highest volume on that day. Where a stock trades across all exchanges, each exchange would continue using its own closing price, leaving the existing practice unchanged in those cases.
To operationalise the framework, SEBI has proposed that stock exchanges sign memoranda of understanding with each other for the purpose of sharing closing price data. The inter-exchange data sharing arrangement is presented as a practical foundation without which the harmonised price band mechanism could not function reliably.
SEBI has invited public comments on the proposals until July 2, giving market participants, exchanges and other stakeholders roughly three weeks to respond. The regulator has not indicated a timeline for finalising the framework after the comment period closes.
