Sebi planning to add more stocks to additional surveillance mechanism

Regulator to tighten inclusion criteria; move aimed at reducing manipulation

The Securities and Exchange Board of India (Sebi) is planning to apply additional surveillance mechanism (ASM) to more securities to discourage investors from making speculative bets.

According to sources, the market regulator is planning to tighten the criteria for inclusion of stocks in the ASM list.

Currently, there are six criteria to shortlist stocks that will be put under ASM. These criteria are based on high/low price variation, close-to-close price variation, concentration of volumes, and monthly volume variation.

Sources say the regulator is also planning to introduce delivery-based volume as an additional condition for selection of stocks to be put under the ASM list. Stocks with less delivery volumes could be viewed with suspicion by the regulator and stock exchanges.

All the stocks under ASM are subject to 5 per cent price filters. Further, investors will have to cough up 100 per cent margin for the trade. After one month of trading in the ASM category, if the stock trades at more than 100 times the price-to-earnings (P/E), it is moved to the so-called trade-to-trade category.

Currently, the regulator has put 85 companies under the ASM framework. Typically, shares moved to the ASM segment see a drop in their prices as it results in unwinding of speculative bets. Also, the impact cost in these stocks rises as volumes dry out.

The market has been opposed to the ASM framework as it believes it has been affecting investor sentiment.

 “The ASM mechanism is unfair to investors since such developments erode the value of a company. We already have several online surveillance measures in place to curb market manipulations and hence there is no need for imposing such additional stringent measures,” said Alok Churiwala, managing director, Churiwala Securities.

Inclusion of a stock to the ASM framework doesn’t essentially mean any wrongdoing. The ASM action merely indicates the stock is under surveillance and doesn’t imply any penal action against the company.

TIGHTENNG THE NOOSE

• Sebi is also planning to introduce delivery-based volume as an additional condition for selection of stocks to be put under ASM

• Trades in ASM stocks are subjected to 100% margin

• A circuit filter of 5 per cent is also applicable

• Since volumes dry out, impact cost also increases

• Currently, 85 stocks are under ASM

Sebi-appointed committee on ‘fair market conduct’, which submitted its report to Sebi last week, has also recommended similar measures to Sebi to curb price manipulation cases.

The committee noted that the large number of cases coming under investigation in the smaller companies was leading to blockage of administrative time and resources of the regulatory machinery, whilst also posing a threat to market activities.

“In order to deter attempts at manipulation in stocks which are illiquid and have low market capitalisation, the committee suggests Sebi may consider increasing the cost of trading in stocks of such companies, taking graded surveillance measures for such stocks, and 100 per cent dematerialisation of shares of these companies,” said the T K Vishwanathan Committee report.

There were 1,053 cases pending with Sebi as on March 31, 2018, of which 516 cases were more than two years old.

Sebi has upped its ante against mid- and small-cap stocks in the last two-three years. The regulator had come out with an interim order against 1,260 entities in 2015 for tax evasion via the stock exchange platform. In 2017, the market regulator directed stock exchanges to initiate action against 331 listed companies which were suspected to be shell entities.