Introduction
Public stock exchanges and the market regulator, Securities and Exchange Board of India (SEBI), take every step to control and monitor the equity markets. Over the years, SEBI has taken many actions to protect the interest of investors and one such initiative is the implementation of 'Graded Surveillance Measures'.
What is Graded Surveillance Measures (GSM)?
GSM alerts the investors about an abnormal rise in share prices. SEBI has structured this mechanism to regulate and monitor the volatility in shares. The companies included in the GSM list often have poor fundamentals and poor financial health. The shares are included in this list based on their shares’ book value, price-to-earning ratio, fixed assets, market capitalisation, net worth, etc.
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What is the main objective of GSM?
GSM helps to improve the efficiency and integrity of the market. The main objective of the GSM are:
- Alert and advise the investors and remind them to be extra attentive while choosing the securities.
- Advise the market participants to follow the necessary due diligence when dealing with GSM-listed securities.
What are the stages of surveillance actions?
SEBI has introduced various surveillance measures, such as periodic call auctions, transfer of securities to the Trade2Trade segment and reduction in the price band. Mainly, 6 stages are involved in surveillance actions for the securities. The securities are shortlisted and moved to the main stages of GSM.
| Stages |
Surveillance actions |
| I |
Trade2trade transfer with a 5% price band or lower, whichever is applicable. |
| II |
Trade for Trade with 5% of the price band or lower, whichever is applicable. Buyers need to deposit (ASD) an Additional Surveillance Deposit of 100% of trade value. |
| III |
Trading is allowed once a week (Every Monday). The buyers must deposit ASD of 100% of the trade value. |
| IV |
Trading is allowed once a week (Every Monday). The buyers must deposit the ASD of 200% of the trade value. |
| V |
Trading is allowed once a month, i.e., the first Monday of every month. The buyers must deposit the ASD of 200% of the trade value. |
| VI |
Trading is allowed once a month, i.e., the first Monday of every month, without any upward movement in the security price. The buyers must deposit the ASD of 200% of the trade value. |
What are the criteria for short-listing the securities?
Following are the detailed criteria to shortlist the securities to the GSM list: -
Criteria 1
These criteria are applicable to include the securities under the GSM framework.
- Securities with the latest net worth less than or equal to Rs. 10 crores. The net worth must include share capital, reserve and surplus and exclude the debit balance of the profit-and-loss account.
- The securities with the latest Net Fixed Assets (including Tangible and Capital work in progress) are less than or equal to Rs. 25 crores.
- The criterion for selecting securities would be those with a price-to-earnings (P/E) ratio greater than twice the P/E ratio of the Benchmark Index Nifty 500. Additionally, securities with a negative P/E ratio may also be considered.
Criteria 2
The following criteria apply to including the securities in the GSM.
- Securities with a full market capitalisation of less than Rs. 25 crores.
- Securities with a price-to-earnings ratio greater than 2 times P/E ratio of the Benchmark Index - Nifty 500
- If securities have a negative price-to-earnings ratio, the following factors should be considered:
- The P/B value of the scrip should be larger than 2 times the P/B value of the benchmark Index - Nifty 500, or
- Negative P/B value.
The bottom line
The GSM list of securities can be checked on NSE or BSE websites. GSM list includes the stocks that are risky and highly volatile. Both NSE and BSE publish their lists to help investors keep track of their stocks and deal with them cautiously. However, buying stocks from GSM stage 2 and above is restricted because they require ASD of 100% of trade value or more.