SEBI, NSE and BSE are working hard to curb price manipulation on Stock Exchanges. There are also instances resulting in Tax Evasion using methods of Price-Rigging. In the past, Exchanges had put Risk- Management practice of declaring Illiquid Stocks, Periodic Call Auctions, Reduction in Daily Price Freeze, Transferring Stocks in Trade-to-Trade Segment, Weekly/monthly/ Quarterly / Yearly Price Freeze etc
To further strengthen the Risk-Management and to Discourage Price Rigging and Tax-Evasion, NSE and BSE came out with another Surveillance measure "Graded Surveillance Measure (GSM)". The detail of circular are NSE here and BSE here.
The Highlights of GSM are
a) Any abnormal price rise not commensurate with Financial health and Fundamentals like Earnings / Book Value / Fixed Asset / Net-worth / PE etc. will be identified.
b) All such identified stocks will be put in T2T with addition surveillance deposits of 100% or 200 % in Cash only by the buyers.
c) If after some time of imposing Additional surveillance deposits, The stocks remains volatile, They may be traded once weekly / Monthly and maybe with a ban on any further Price Rise.
d) The stock eligible for GSM will be identified from time to time and will be reviewed on Quarterly and Six Monthly basis.
e) Additional Surveillance deposit will be credited only after quarterly review and It wont be refunded before quarterly review, even if the bought stock is sold in market.
The Points to ponder in this circular could be :
a) Exchanges want to curb the price rise and manipulation but hypothetically if GSM is declared in a particular stock, What may happen ? The buyers in such stock will vanish and also we may see many seller in the stocks.. but then who will buy? As buyers will have to pay additional surveillance deposits and may also probably get inquiries from stock exchange for buying.
Then why would anybody buy that stock and If nobody buys it, price will also not fall. Also Volumes will dry and minority investor will be struck.
b) The Additional Surveillance deposits is payable only by the Buyers, and the Sellers rights are unhindered. It does not matter that sellers now were not selling when the price was rising, also it does not matter if the sellers are the promoters / operators along with other shareholders. They will get their money on payout.
c) As per circular, The criteria for stocks falling in GSM are conventional methods of Earning, Book Value, Fixed Assets, Net-worth , P/E etc but Are this criteria sufficient to decide if the stock is over- valued ? What about future expectations ? Higher valuation because of M & A target ? What about written down assets ? What about Investments of holding companies ? Expectation of some News / Orders / govt relaxations ?
There are different parameters to evaluate companies of different sectors and many Sectors have their unique valuation parameters . So GSM criteria can be biased on both criteria of escaping the GSM (IF accounts are manipulated) and Falling under GSM (If the companies have value but under different valuation model accepted in that industry).
Moreover GSM have yet not laid clear-cut criteria for stocks falling under it.
d) Since GSM have not laid clear-cut criteria for Stocks falling under it, There are probability to evaluation on Case-to-case basis and which may lead to decision based on perception of Risk Management officer.
e) Once the stock rises for few day, there will be fear of stocks coming under GSM, which may lead to players avoid the stocks and person who may be privy to news in such companies can make super normal profits.
f) Stocks however good, but once it falls under GSM, they may be tagged as tainted and will be avoided by traders.
g) Positively, If Risk-management is taken care using GSM, it makes a case for Weekly / Monthly / Quarterly / Yearly circuits to go as unwanted price rise will be taken care by GSM.
i) The biggest impact may be on Small-caps and Micro-Caps.
I believe, Exchange will come out with more clarity and transparency on criteria for stocks falling under GSM, So that retail investors / Traders / Jobber / Market makers can avoid such stocks or exit from such stocks which can come under the ambit of GSM.
Bottom-line : GSM will suck liquidity from stocks and exits will become difficult.
This is not a recommendation to anybody whatsoever to buy OR sell any share, but it is my thought process and views on this topic.
I welcome your critical comments and suggestions.