SEBI and stock exchanges, to enhance market integrity and safeguard investors, have introduced Additional Surveillance Measures (ASM) on securities.
As on 19-02-2021, 120 stocks are under the long-term list of ASM and 41 stocks under the short-term list. Shortlisting of securities for placing in ASM is based on the following parameters:
1. High Low Variation
2. Client Concentration
3. Close to Close Price Variation
4. Market Capitalization
5. Volume Variation
6. Delivery Percentage
7. No. of Unique PANs
ASM is good for investors as SEBI would thoroughly verify any unexpected price movement in a stock. It will control speculative activities and reduce the possibility of any malpractice.
How ASM works?
Stock Exchange has introduced ASM mainly for controlling Speculation (Trading) in the stock. ASM includes 2 basic points:
1. Circuit Filter 5%
2. 100% margin on open positions of stocks
Being in ASM will put restrictions on intraday trading in these stocks. More importantly, it will be mandatory for brokers to keep 100% margin on these stocks as against 35% OR 40% in the usual case. It effectively means that margin trading will be disabled in these stocks. However, these stocks will be available for buying under the cash segment.
Such curbs will discourage speculators and intra-day traders from taking heavy positions in stocks. It is often that flight of such traders leads to liquidity evaporating, causing stock prices to drop. Now, with these restrictions, unstable traders will not be able to take out a huge chunk of money at one go. It in turn will lend stability to stock price.
The companies can get in and out of the list based on the review conducted by exchanges every 2 months.
What is Graded Surveillance Measure (GSM)?
GSM is a system designed by SEBI to keep a check on shares that see an abnormal price movement – out of sync with its financial health or fundamentals.
These companies are often characterized as penny stocks. They are illiquid, have a negligible market cap, and poor fundamentals. Such securities are often vulnerable to financial misconduct.
With GSM, SEBI intends to identify suspicious such shares at an early stage and protect investors from dealing in them. Such shares are monitored for sudden changes in earnings, book value, fixed assets, net worth, and price to earnings multiples, among other factors.
Stages of GSM?
Once a company is identified under GSM, it goes into one of the six stages of the GSM. With every stage, the restrictions get progressively higher.
At the first stage, securities are placed under trade-to-trade category, and a maximum of 5% price movement in shares is allowed. At the second stage, Additional Surveillance Deposit (ASD) is applicable on these shares. It is in addition to the restrictions imposed in the first stage. The ASD will be retained by the exchange for 5 months.
In the third and fourth stages, buyers are allowed to trade in security only on the first Monday of the week. They attract paying an ASD of 100% and 200% respectively on the traded value.
At the fifth stage, trading is permitted only on the first Monday of a month in addition to an ASD of 200%. And, at sixth stage trading in these shares are permitted only on the first Monday of the month, without any upward movement in price.
How do companies get out of GSM?
SEBI will conduct a review process twice a year where companies will be moved in or out of GSM. Also, a quarterly review will be carried where companies can be moved back and forth.
The companies are also given a right to challenge SEBI in the Securities Appellate Tribunal or the high courts for relief.
Implications for Teji Mandi Investors:
By introducing these measures, SEBI has tried to restrict investments in stocks with suspicious price movement or excess volatility. This covers stocks where prices don’t reflect the fundamentals.
Investors should take it as a warning sign if their stocks fall under this list. We at Teji Mandi do not invest in stocks listed under the GSM list. However even a fundamentally sound stock can enter the ASM list.
It is possible that one of the stocks in the Teji Mandi portfolio might fall in this list. In this case some brokers like Zerodha have added the concept of TOTP (Time-based OTP). If we were to sell a stock which is on the ASM list through Zerodha – you can follow the instructions [here]() to set the TOTP.