Explained: What happens when IBC-linked stocks face market restrictions

Reliance Infrastructure's plea to review ASM restrictions puts the spotlight on whether insolvency-linked trading curbs protect investors or limit their exit options

When a listed company faces insolvency proceedings, its stock may face tighter trading rules on the exchanges. According to the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), such curbs are meant to safeguard investors and maintain market integrity when a stock shows higher trading risk.

 

Reliance Infrastructure’s latest plea to review these restrictions has brought that concern into focus, as it raises the question of whether rules meant to protect investors can also make it harder for them to sell their shares.

What triggered the debate

Anil Ambani's Reliance Infrastructure Limited (RInfra) on Sunday submitted a formal representation to the Securities and Exchange Board of India (Sebi), NSE, and BSE, seeking a review of the Additional Surveillance Measure (ASM) framework linked to the Insolvency and Bankruptcy Code (IBC). The company has argued that the trading curbs have affected liquidity, price discovery, and more than 700,000 public shareholders. 

 

According to the disclosure submitted to exchanges, RInfra said the current framework permits trading only once a week within a narrow 5 per cent price band. The company argues that such trading conditions make price movement mechanical and predictable, rather than reflective of the company’s business performance, legal status or investor demand. 

RInfra said its shares are otherwise actively and widely traded in the market, reflecting sustained investor participation and liquidity. "As part of its representation, Reliance Infrastructure has proposed a calibrated approach that retains key risk-mitigation measures, including gross settlement, 100 per cent margin requirements, Additional Surveillance Deposit (ASD) and price-band safeguards, while enabling more effective price discovery," the company said in its submission. It has requested regulators to consider alternatives such as a periodic call-auction mechanism or a wider and graded price band to facilitate genuine two-sided trading. 

The company further submitted that the impact of these restrictions falls disproportionately on its public shareholders. During lower-circuit phases, shareholders are often unable to exit their investments at a reasonable market price, while the value of their holdings erodes by a near-fixed percentage each week.

What is ASM?

ASM is a surveillance tool used by stock exchanges and Sebi to keep a closer watch on certain stocks. It is not a declaration that a company is bad or that investors should not trade in it. It is a risk-control framework. 

In its September 2025 FAQs on ASM, NSE says regulators have introduced pre-emptive surveillance measures to enhance market integrity and safeguard investors. These measures can include reducing the price band, putting a stock in periodic call auction, or shifting it to the trade-for-trade segment. 

In simple terms, these measures are like speed breakers in the stock market. They do not stop the road, but they slow down trading when the exchange believes there may be a higher risk.

What changes for IBC-linked stocks?

When a company enters an insolvency process under the IBC, the exchanges can place its shares under a special surveillance framework. BSE notices show that securities of companies relating to the Insolvency Resolution Process under IBC can be placed under ASM, with the list reviewed periodically. 

From a regulatory point of view, this makes sense because a company facing insolvency can have uncertainty around who controls it, how much debt will be repaid, what its assets are worth, and who may eventually own it, making its stock more vulnerable to panic trading, rumours, sudden spikes, or sharp falls. 

But the RInfra case is more complicated because the company has argued that the National Company Law Appellate Tribunal (NCLAT) had stayed both the insolvency admission order and the Corporate Insolvency Resolution Process. It has also said in its submission that no Resolution Professional has taken control and that the board continues to manage the company in the normal course of business. 

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How investors may be affected

For public shareholders, the main issue is liquidity, which means the ease with which investors can buy or sell a share. If trading is allowed every day, investors have more chances to exit. If trading is allowed only once a week, exiting becomes harder. 

Also, because of the narrow price band, if the stock can move only 5 per cent in either direction, the market may take much longer to reflect new information. Online brokerage platform Zerodha explains that circuit limits, or price bands, are safeguards set by exchanges to prevent large price movements. It also says that orders outside the price band are rejected, and if the price reaches the upper or lower band, orders can remain pending until the exchange relaxes the limits. 

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How trading curbs affect share prices

Price discovery is the process through which the market decides the fair price of a stock. In normal trading, thousands of buy and sell orders interact throughout the day. That helps the price respond to news, earnings, court orders, debt updates, and investor sentiment. 

However, when trading is restricted, this process becomes slower. A once-a-week trading window and a tight price band can limit how quickly the share price reacts to fresh information. 

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According to NSE, exchanges cannot allow unrestricted trading in stocks that may be exposed to legal or financial stress because retail investors can be vulnerable to rumours, operator activity, and sudden price manipulation in such counters. That is why surveillance frameworks exist. The aim is to slow down risky trading conditions and give investors a warning signal. NSE calls these as pre-emptive measures.