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All you wanted to know about.... Additional Surveillance Measures

Gurumurthy K | Updated on July 30, 2018

Globally, market regulators often get nervous if stock prices turn volatile. In India, the bourses often impose curbs such as price bands and circuit filters to safeguard investors from excessive volatility in individual stocks. The latest such move is the Additional Surveillance Measures (ASM) introduced by the Securities and Exchange Board of India (SEBI) and the domestic exchanges.

What is it?

ASM is a surveillance method in which exchanges impose trading curbs on excessively volatile stocks in the Indian market.

Currently, the exchanges short-list stocks that meet any of the following five criteria for additional surveillance: 1) The price variation between the high and low price (called the spread) in the last three months is 200 per cent or more, and the concentration of top 25 clients in the stock is 30 per cent or more; 2) The spread is 200 per cent or more and the stock has hit the price band 30 per cent or more times; 3) The stock has a negative PE and has shown a price movement of 100 per cent or more in the last 30 trading days and the concentration of top 25 clients is 30 per cent or more; 4) A stock with a market cap over ₹500 crore whose price has moved more than 100 per cent, spread is more than 200 per cent in the last 365 days and greater than 50 per cent in the last 90 trading days; 5) A stock with a market cap above ₹500 crore where the concentration of top 25 clients in a quarter is greater than or equal to 50 per cent and five or more of these clients have 50 per cent or more of their trading activity in it.

While any listed stock can be swept under ASM, the exchanges have granted special exemptions to PSUs, securities with derivative products and stocks under Graded Surveillance Measure or the trade-to-trade segment.

Why is it important?

Once a stock is caught in the ASM net, it attracts a bunch of stricter exchange rules on intra-day price movements. If Stock A enters the surveillance list today (July 31), it will be moved into a 5 per cent price band on August 1. That is, its price can move only 5 per cent either way from the previous day’s closing level. The stock will be halted from trading for the rest of the day if it breaches the 5 per cent limit. From the fifth trading day (August 7, in our example), 100 per cent margin money will be required to trade Stock A.

A stock in the surveillance list will be moved to trade-to-trade settlement if its PE ratio shoots above 100. It will be moved out of the list if its PE falls below 10 or below the ratio of Nifty 500 Index.

Such curbs discourage speculators and intra-day traders from taking heavy positions in stocks. The flight of such traders often leads to liquidity evaporating, causing stock prices to drop.

Why should I care?

Though the exchanges say that surveillance measures are no reflection of a company’s quality or fundamentals, the market hasn’t taken these measures so lightly. Stocks under ASM are the most beaten down in the BSE 500 and Nifty 500 indices so far this year. It looks like panic is triggering a sharp sell-off in the scrips that are entering the surveillance list. But even if you don’t panic, there’s a possibility of getting stuck with a stock without getting an opportunity to exit because of the narrow 5 per cent price band criteria.

Whether you’re a long-term or short-term investor, it is important for every market participant to keep an eye on the securities under surveillance. As on July 27, there were 87 stocks on the NSE and 137 stocks on the BSE on the surveillance list.

The Bottomline

Beware if the stock you are holding is behaving strangely. The ASM axe may be waiting.

Published on July 30, 2018

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