Norms to move stocks under additional surveillance mechanism get stricter

The new rules also consider a stock's valuation-price to earnings ratio, client concentration and gyration in the stock price over a period of one month and one year

In a bid to further improve the risk management system, the Securities and Exchange Board of India (Sebi) and bourses have tightened rules for putting stocks under the ‘additional surveillance mechanism’.

The new rules also consider a stock’s valuation, price to earnings ratio, client concentration and gyration in the price, over a period of one month and one year.

Market experts said the new criteria could result in ASM being imposed in more stocks. Stocks under ASM are allowed to trade only in a five per cent band and leveraging is barred. A few weeks ago, the NSE and BSE had moved 109 stocks to ASM following which some stocks had seen a huge correction in their prices.

The new criteria for ASM was set following a joint meeting of exchanges, Sebi and clearing corporations. Interestingly, the new ASM rules exclude public sector enterprises (PSUs) and public sector banks.

Accordong to the new rule, while calculating client margins, a possible rise in the security will also be considered. Until now, the margin was calculated assuming a potential 20 per cent fall in the security and possible loss arising due to such fall. ASM calculation will also involve a potential rally of 17.74 per cent in the index. 

The new ASM framework will be reviewed every two months, based on parameters such as number of price band hits, close-to-close price variation, price to earnings (P/E) ratio and high-low price variation.

Further, selection under the ASM framework will include stocks where the high-low price variation is 200 per cent or more in the last three months and concentration of top 25 clients in the last three months is 30 per cent or more.

Also, it includes scrips where the close-to-close price variation in the last 30 trading days is 100 per cent or more and P/E is negative. 

Furthermore, a stock with a closing price variation in 365 days of more than 100 per cent and high-low variation of 200 per cent or more during the period, market cap of over Rs 5 million and high-low variation in 90 trading days of over 50 per cent, will be the part of the new ASM.

After a month, scrips with P/E ratio greater than 100 will be placed in the trade-for-trade segment. 

“Scrips having P/E ratio of less than 10 will be moved out of the ASM framework and closing price will become the base price for subsequent reviews,” the circular issued by exchanges said. 

According to exchanges, the rules will not be applicable to stocks that are already under the so-called graded surveillance measure (GSM). The exchange will soon come out with the effective date for implementation of the new surveillance mechanism.