Graded Surveillance Measure: All That You Need To Know

Graded surveillance measure (GSM), does it sound like a military operation? Well, it is a surveillance method adopted by SEBI to guard the interest of honest investors. BSE has a list of over 900 companies under the GSM list that are monitored by the market watchdog.

Graded surveillance measure is a method to keep a tab on unrealistic price and demand rise of company stocks that don’t commensurate with the financial health and fundamentals of the company.

The method segregates companies under several grades to alert investors regarding possible unscrupulous activities with stock pricing. The trigger goes off when the regulator detects abnormal movements to increase the stock price that may put the company under the category of “shell companies”. This way, investors will come to know which stocks to avoid.

SEBI (Securities and Exchange Board of India) in its capacity as a market regulator introduces several surveillance measures to improve the integrity and efficiency of the market and safeguard investor interest. SEBI uses a reduction in price band, periodic call auction, and transfer of securities to Trade to Trade segment to curb unethical practices.

How Does The GSM System Work?

The SEBI may warn the exchange when it suspects an unusual increase in stock price of a company. When there is a significant rise in stock price, not supported by the financial health or fundamentals of the company, it could be a case of price rigging.  There is a possibility that these companies are being used for possible money laundering activities. In such cases, SEBI will warn the exchange to monitor price action or even order a suspension of trading of such company shares. When a company share is put under the surveillance list, it gives a heads up to the investors to be extra cautious while dealing with these stocks.

The process of placing stocks under the list of “shell companies” is a six steps process. With each step, restriction on trading increases.

At the first stage, the stocks are placed under Trade to Trade monitoring that prevents all sorts of speculative trading but allows only restricted delivery of equities on mandatory payment of consideration. In this stage, only 5 percent movement in stock price is permitted.

Restriction increases with each step. When the stocks enter the second stage, buyers of such shares need to pay 100 percent of the trade value as surveillance deposit at least for five months. From the third step onwards, a restriction is imposed on trading – only sparsely allowed – along with an increase in deposit volume. If buyers want to purchase stocks that are placed under fourth or fifth stages, they have to pay 200 percent of the trade volume as a deposit with the exchange.

The sixth stage is the highest with maximum restriction where trading allowed only once in the month with no upward movement in price.

What Happens To The Stocks In The List?

SEBI introduced graded surveillance measure in February 2020, and till then, almost 700 companies are placed in the GSM list. So, what does it mean? Do the stocks remain in the list for good?

Not always. SEBI conducts review twice a year, and based on the evaluation, it moves stocks out of GSM list. Also, there are provisions for quarterly review where companies in higher stages are rolled back to the lower level.

A company can challenge its position in the GSM list. They can contradict SEBI’s (or bourse’s) decision in the Securities Appellate Tribune or the high court. If the company wins, SEBI will lift all trading restriction. Recently, the tribune asked SEBI to remove all trading restrictions from J Kumar Infra and Prakash Industries.

Conclusion

GSM in share market acts as a filter that separates good stocks from the bad ones.  When a company stocks are placed under surveillance, there is newspaper announcements as well as an update on BSE and NSE websites. But often these announcements are sudden and immediate, which means you might not get enough time to exit the trade.