What is Graded Surveillance Measure?

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  • 06 Nov 2023
What is Graded Surveillance Measure?

Key Highlights

  • In cooperation with exchanges, the GSM framework has been set up by SEBI and is based on a graded surveillance measure.
  • Strengthening market integrity and protecting investor interests have been its main objectives.
  • NSE and BSE websites can be used to track the stocks moved to GSM.

To protect the interests of honest investors, SEBI has adopted a system of graded supervision measures. BSE has a list of more than 900 companies included in the GSM database that are under surveillance by the market regulator. Graded surveillance measures are a means of monitoring unrealistic price and demand increases in company stocks that are not in line with the financial health and fundamentals of the company.

This approach assigns a grade to corporations in order to warn investors about the potential manipulation of stock prices. The regulator sets off the trigger when it notices unusual price swings that might classify the company as a "shell company" and raise the stock price. In this manner, investors will learn which stocks are worth keeping.

In its capacity as a market regulator, the Securities and Exchange Board of India introduces a number of surveillance measures in order to enhance market integrity and efficiency while protecting investor interest. In order to prevent unethical practices, SEBI uses price band reduction, periodic call auctions and the transfer of securities into a Trade To Trade segment.

If it suspects an extraordinary rise in a company's price, the Securities and Exchange Board of India may warn the exchange. It could be a case of price manipulation if the stock price rises significantly without being supported by the company's financial health or the company's fundamentals. These companies may be used to carry out money laundering activities. The SEBI shall warn the exchange if price movements are detected or suspend trading of those companies' shares.

If a company's shares are included on the surveillance list, it gives investors an alert that they should exercise greater caution when dealing with these stocks. Six steps are involved in placing stocks on the list of shell companies. Restrictions on trade will increase as each step is taken.

In the first stage, stocks are placed under trade surveillance, which prevents all kinds of speculative trading and allows only limited delivery of shares pursuant to mandatory payment obligations. Only 5% of the stock's price is allowed to move at this stage.

The restriction goes up with each step. The buyers of such shares will have to pay 100% of the market value as a security deposit for at least five months when the stocks reach the second stage.

In the third level and beyond, trading is restricted to being done so infrequently, and the amount of deposits is increased.

The buyers are required to deposit 200 per cent of the trade value as a security with the exchange if they intend to buy stocks that have been entered into four or five stages.

Where trading is permitted only once a month with no upward movement of prices, the sixth stage shall be the highest where maximum restrictions apply.

A number of factors affecting GSM are listed below.

  1. Financial performance and health.
  2. Corporate governance and regulatory compliance.
  3. Markets' behaviour and irregularities in trade.
  4. Past track record and transparency.
  5. On the basis of these factors, the overall risk assessment is carried out.

GSM companies may require a full program of compliance. For the purpose of making investments, companies with advanced GSM grades are seen to be more stable and less risky. Participation in buybacks, issuance of bonus shares and payment of dividends are affected by the company's GSM grade.

Low market capitalisation and trading volume companies might be more subject to GSM measures. Businesses that violate rules on a regular basis and don't raise their GSM grade risk of being taken off the stock exchange.

The implications of GSM are as follows.

  1. A higher GSM rating of between 1 and 3 means stability and attracts investors.
  2. There may be trading restrictions and an impact on stock liquidity if GSM grades 4-7 are reduced.
  3. A company with Grade 1 GSM is frequently considered a blue chip stock.
  4. In order to maintain market integrity and transparency, GSM's activities are aimed at this end.
  5. For the improvement of corporate governance, companies that the GSM covers may have to nominate additional independent directors.
  6. The implementation of strict internal controls and reporting mechanisms by companies operating under GSM may be required.
  7. GSM companies could appoint a compliance officer to check and report on legal compliance.
  8. Investor confidence may be weakened in companies belonging to the GSM group.
  9. Delisting is possible due to repeated GSM actions.

Conclusion

GSM filters out good stocks from bad ones in the stock market. There are newspaper announcements as well as updates on the BSE and NSE websites when company stocks are placed under surveillance. However, because of the sudden and rapid nature of such announcements, you may not be given sufficient time to exit this business.

FAQs on Graded Surveillance Measure

In order to control volatility, SEBI has introduced ASM, while GSM is used to protect investors against stocks that deviate from the fundamentals.

The lists of AMS and GSM are intended to detect and analyse unusual price movements. ASM restricts price movements to a range of 5%, and GSM is adopting various levels of regulation with regard to volatility in prices.

These measures are aimed at raising awareness and promoting a higher degree of prudence for investors, as well as advising market participants to take the necessary precautions in their dealings with these securities.

Greater monitoring and supervision of specific securities has been introduced within the GSM framework. In particular, these securities are included in the GSM list as they represent a warning and advice to investors on what to be particularly careful about when dealing with them.

If the clients have a GSM stage 2 or higher stock on their account, they may continue to trade stocks from holdings.

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