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Why is buying restricted for GSM stage 2 and above stocks

29 Nov 2023

Graded Surveillance Measure (GSM) is a regulatory method introduced by the Security Exchange and Board of India (SEBI). It is to safeguard the interest of the investors by monitoring the unrealistic price and demand rise of stocks. This includes various existing surveillance measures like periodic call auctions, price bands, and the transfer of securities to the trade-to-trade segments.

What is Graded Surveillance Measure (GSM)?

GSM is a measure that SEBI introduces to control and monitor the abnormal price rise and demand-supply in the market. Bombay stock exchange (BSE) has included almost 900 companies in its GSM list, which requires monitoring and regulations. The companies listed under the GSM list are separated based on their grades. 

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SEBI is regulating these activities by several surveillance measures like reduction in price band, transfer of securities, etc., to curb these unethical practices. The main objective of these measures is to: 

  • Alert the investors regarding abnormal activity and advise them to follow the required due diligence while investing in these securities. 
  • Advise the investors to be extra careful while dealing with these securities. 

What are the Different Stages of Surveillance Measures under GSM?

Following are the necessary stages of surveillance actions under the GSM list. 

 

Stages

Actions

Stage I

The applicable margin rate will be 100%, the price band will be 5% or whichever is lower. 

Stage II

Trade for trade with 5% of the price band or lower. And Additional Surveillance Deposit (ADS) shall be 50% of the trade value, which is to be deposited by the buyers. 

Stage III

Trade for trade with a 5% of price band or lower, whichever is applicable. Trading is permitted once a week, i.e., every Monday or 1st trading day of the week. And ASD with 100% of trade value must be deposited by the buyers.  

Stage IV

Trade for trade with 5% of the price band or lower, whichever is applicable. Trading is allowed once a week, i.e., every Monday or 1st trading day of the week. ASD with 100% of trade value is to be deposited by the buyers without any upward movement.  

Why GSM stage II and above stocks are restricted from buying

Buyers won’t be able to buy stocks that are present in GSM stage II or above. This is because the second stage of GSM and above requires an Additional Surveillance Deposit (ASD) of 100% of the trade value or may be higher. This is why the buyers are restricted from buying these GSM stage II or above stocks. 

Since stage II of GSM requires ASD of 100% of trade value or more, it will remain blocked by the exchanges. Even after the stocks are sold, they are restricted from being bought for a period of at least 2 months. These restrictions apply to fresh purchases of the stocks, while traders can still sell their stock from holdings if they have the stage II GSM stocks in their portfolio. 

Criteria for short-listing securities for GSM List

The following are some important criteria that need to be met while short-listing the securities for the GSM list. 

Criteria 1

  • The net worth of the security is less than or equal to Rs 10 crores.
  • The net fixed assets, including tangible assets and capital work in progress, should be less or equal to Rs 25 crore. 
  • The price to earning (PE) ratio is greater than twice of PE of the Index (Nifty 500) or a negative PE.

Criteria 2

Securities should meet the following criteria for direct inclusion under the GSM stage I: 

  • The market capitalisation of less than Rs 25 crore.
  • PE is greater than twice the PE of the index (Nifty 500) or a negative PE.
  • The price to book (PB) value should be greater than twice of PB of the Index or negative. 

The Bottom Line 

Over the years, SEBI has brought up various policies and guidelines to protect the interest of investors. Among all these initiatives, Graded Surveillance Measures (GSM) alert and advise investors to be careful while choosing securities. The company listed under the GSM list is often illiquid, has poor fundamentals, and has low market capitalisations.

 

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