After introducing the call auction mechanism in Sensex and Nifty stocks, the Securities and Exchange Board of India (Sebi) is mulling extending this to the proposed platform for small and medium enterprises (SMEs), although with a few changes.
The regulator believes the mechanism will help in price discovery of stocks, especially those that are not much in demand.
People familiar with the development say Sebi is toying with the idea of introducing 15-minute call auction windows at regular intervals. It has proposed this in its discussions with exchanges and other market participants.
Under the mechanism, buy and sell orders are collected over a fixed period and then processed in an auction.
The price at which the highest number of orders is placed is chosen. In other words, buy/sell orders are not executed immediately.
"It is believed the (call) auction mechanism will help create liquidity in the SME market, as there could be many stocks for which buy/sell orders are not in large numbers," said a person privy to the discussions.
"The SME platform is different from the main market and one auction session will not suffice. Hence, the idea is to have 15-minute windows throughout the trading session," he added.
Susan Thomas of Indira Gandhi Institute of Development Research, in a research paper titled, "Call auction: A solution to some difficulties in Indian finance", said, "Call auction can help deal with issues such as market opening, market closing, extreme news events and can be potentially beneficial for illiquid securities, including bonds."
The concept is not new to India. Stock exchanges introduced a 15-minute pre-opening call auction session for Sensex and Nifty stocks in October 2010.
While the first eight minutes are reserved for order entry, modification and cancellation, the next four minutes are for order matching and trade confirmation.
The remaining three minutes is the buffer period to facilitate the transition to the normal market.
Sebi announced the draft guidelines for the SME platform in late 2009. The guidelines called for merchant bankers to perform market-making activities for three years.
They also did away with the process of vetting offer documents for listing on the SME segment.
Hence, an investment banker would be responsible for due diligence and filing the prospectus with the market regulator and the exchange.
An upper limit of Rs 25 crore paid-up capital has been fixed for a company to list on the segment.
The companies will be shifted to the main exchange if they cross the limit. SMEs would be required to submit financial numbers on a half-yearly basis.The minimum IPO size has been pegged at Rs 1 lakh.