24-Sep-2017: Graded Surveillance Measure by Securities and Exchange Board of India (SEBI)
More than 900 companies are being monitored under the Graded Surveillance Measure, designed by market regulator Securities and Exchange Board of India (SEBI).
SEBI introduced the measure to keep a tab on securities that witness an abnormal price rise that is not commensurate with financial health and fundamentals of the company such as earnings, book value, price to earnings ratio among others.
The underlying principle behind the graded surveillance framework is to alert and protect investors trading in a security, which is seeing abnormal price movements. SEBI may put shares of companies under the measure 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.
Once a firm is identified for surveillance it goes through six stages with corresponding surveillance actions and the restrictions on trading in those securities gets 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% 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 i.e. every Monday, apart from the buyer putting 100% 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% 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%.
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%.
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. The 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. There is also potentially another risk. For example, even if time is given, the stock might crash next day on the news, triggering the lower price circuit and leaving no exit opportunity.