Mechanism to check abnormal rise in stock prices

On May 31, stock exchanges released a list of 109 stocks on which additional trading curbs were to be imposed. SEBI’s latest move to implement Additional Surveillance Measures (ASM) is in order to keep a tab on securities that witness an abnormal price rise – that is stock prices do not commensurate with financial health and fundamentals of the company such as earnings, book value and price to earnings ratio among others.

Implementation of Additional Surveillance Measures (ASM) is good for investors as the market regulator would keep a track on stocks price volatility and price variation. Further, stocks circuit filter has been revised to 5 per cent and margin of 100 per cent required in ASM stocks. ASM companies can be moved to T2T segment after predetermined objective criteria.

The underlying principle behind the graded surveillance framework is to create alertness and protect investors trading in a security, which is seeing abnormal price movements. Market regulator, SEBI may put shares of these companies under ASM for suspected price rigging or under the ambit of ‘shell companies’. The measure would provide a heads up to market participants that they need to be extra cautious and diligent while dealing in such securities put under surveillance.

Short-term panic

ASM would be good for investors. There can be short-term panic in all those stocks which are identified under ASM by SEBI. But good and quality businesses with honest and good management would get back to normal once Sebi gives clearance to them. Even ‘A’ Group stocks like Radico Khaitan, Rain Inds, Bombay Dyeing and Dilip Buildcon are under ASM.

As announced by SEBI, the graded surveillance measure will go through six stages with corresponding surveillance actions and the restrictions on trading in those securities get higher progressively. In the first stage, the securities are put in the trade-to-trade segment, meaning no speculative trading is allowed and delivery of shares and payment of consideration amount are mandatory. A maximum of 5 per cent movement in share price is allowed.

In the second stage, in addition to the trade-to-trade segment, the buyer of the security has to put 100 of trade value as additional surveillance deposit. The deposit would be retained by the exchanges for a period of five months and refunded in a phased manner. In the third stage, trading is permitted only once a week, that is every Monday, apart from the buyer putting 100 per cent of the trade value as additional surveillance deposit.

In the fourth stage, trading would be allowed once a week and the surveillance deposit increases to 200 per cent of the trade value. In the fifth stage, trading would be permitted only once a month – first Monday of the month – with additional deposit of 200 per cent.

In the sixth and final stage, there are maximum restrictions. Trading is permitted only once a month at this stage, with no upward movement allowed in price. Also, the additional surveillance deposit would be 200 per cent.

The big question among investors is: Will securities remain permanently in the Graded Surveillance list? The response is – ‘Definitely no, there would a quarterly review of securities’. Based on criteria, the securities would be moved from a higher stage to a lower stage in a sequential manner.

As and when a security is shifted to various levels of surveillance, it is publicly announced on a daily basis on BSE and NSE websites as well as through circulars to the stock brokers. Moreover, the exchanges can also appoint independent auditors to audit the books of accounts of these companies and do forensic audit, wherever needed.

This indirectly may also be an indication that the sudden rise in either the volumes traded or the price increase are not commensurate with the fundamentals of the said companies and hence small/retail investors are protected from getting stuck in such stocks inadvertently on some wrong advice.


The only challenge for the small investors is that these announcements are often made at very short notice and implemented from the next day itself thus giving those who have already entered the stock less than adequate time to exit it. Of course, there is also potentially another risk. For example, even if time is given, the stock might crash the next day on the news, triggering the lower price circuit and leaving no exit opportunity.

Increased vigil is aimed at checking any abnormal rise in stock prices not commensurate with the financial health of companies. But it is expected to impact liquidity in midcaps and add to the selling pressure. The S&P BSE MidCap Index has already fallen nearly 13 per cent this year compared to a 2 per cent gain in the benchmark S&P BSE Sensex.

However, SEBI should have given enough time for small investors to exit since brokers fund on the stock and small and big investors did not got enough time to exit since it was implemented in a day.

(The writer is AVP, Arihant Capital Markets)