The market regulator Securities and Exchange Board of India (SEBI) has amended its guidelines on dynamic price bands for scrips in the derivatives segment in order to improve uncertainty in management and reduce information disproportion.
- A dynamic price bands mechanism (operating range) has been implemented by the stock exchanges for the scrips that does not require price bands.
Important facts:
Scrips – Scrip is a term that refers to any kind of substitute for money that is not legal tender. It can be used as a form of credit, where the scrip holder can exchange it for something of value in the future. For example, a scrip dividend is a way of paying shareholders with additional shares instead of cash.
Price Band – A Price Band is a price floor and a cap between which a seller will allow the buyers to place bids on a security, usually during an initial public offering (IPO).
Key Points of the amended framework:
i.In the present scenario, cash market and futures contracts begin with a price band at 10 per cent of the previous day’s closing price, which can be altered by 5 per cent during the day if there are at least 25 trades involving 5 unique client codes (UCCs) on each side at or above 9.90 per cent. Each adjustment follows a 15-minute cooling-off during which trading continues within the current band.
- The current rules have been amended by SEBI wherein conditions are enhanced to 50 trades, 10 unique UCCs, and 3 trading members on each side for adjustments.
ii. The price band for the scrip and all its futures contracts on any exchange shall be adjusted after a cooling off period, provided that conditions are met in either cash market or current month contract at any exchange.
iii.In order to tackle the inconsistency, SEBI will increase the cooling off period of 15 minutes and would decrease the flexing per cent of 5 per cent in a calculated manner.
iv. In the case of the first two adjustments, the price band shall be adjusted by 5 percent after a cooling period of 15 minutes and 5 minutes if the adjustment occurs during the last half hour of trading. The price band shall be adjusted by 3 percent after a cooling period of 30 minutes and by 2 percent after a cooling period of 60 minutes for the next two adjustments.
Note:The circular would be implemented by stock exchanges in a phased manner starting from June 3,2024.
Important Facts:
Cooling off Period – The cooling-off period, also known as the “quiet period,” is the time between when a company files its registration statement with the Securities and Exchange Commission (SEC) and when the registration statement comes into effect allowing the securities to be sold to the public.
Hedging – A hedge is an investment that helps limit your financial risk. A hedge functions by holding an investment that will move in a different direction from the prime investment, so that if the prime investment declines, the investment hedge will offset or limit the overall loss.
