The Bombay Stock Exchange (BSE) on Wednesday clarified on the new additional surveillance rules that intend to curb excessive price movement in securities listed on BSE. Earlier on Wednesday morning in early trades, there was bloodbath in the mid-cap and small-cap stocks due to panic after a BSE circular which was released on 9th August.
During the current week, BSE Midcap Index was down nearly 4%, while BSE Smallcap Index plunged over 5%.
''In continuation with our endeavour to maintain market integrity and curb excessive price movement in securities listed exclusively on BSE Trading Platform, a need has been felt to further strengthen the extant surveillance measures. Accordingly, a new surveillance framework viz. Add-on Price Band Framework is being introduced by the Exchange for securities listed exclusively on BSE Trading Platform," BSE circular issued on 9th August had said.
Accordingly, the short-listed securities, shall have 6-monthly, 1-yearly, 2-yearly and 3-yearly price band in place of weekly, monthly, quarterly price band.
The 9th August circular did not mention the stock groups after which the broader market witnessed a sharp sell-off, therefore, to clarify the same, BSE issued a new circular today in which it mentioned the groups for which the framework is applicable. These additional norms will be applicable from 23 August 2021.
Subsequent to the BSE’s clarification today morning, mid-cap and small-cap stocks made a sharp recovery.
In a circular
released on Wednesday morning, BSE said that in partial modification and supersession of the Exchange circular dated 9th August, the following clarifications are being provided to simplify the understanding and implementation of the framework that the said framework is applicable to BSE exclusive securities in groups, viz., X, XT, Z, ZP, ZY and Y.
Also, securities should have a price of Rs10 and more (as on review date) and the market-capitalisation the security should be less then Rs1,000 crore.
For the stock to be put under watch, they need to have moved either 6x in the past six months or 12x in as many months or 20x in two years or 30x in three years.
Clarifying on the review cycle, BSE said “A security placed in Add-on Price Band Framework shall remain in the framework for a minimum period of 30 calendar days and shall be eligible to move out if it does not qualify the provisions of this framework thereafter. Review of the short-listed securities under the framework i.e. inclusion/exclusion shall be carried out on monthly basis.”
The add-on price bands shall be in addition to the applicable daily price bands of such securities. In case of corporate actions of a material nature, like rights issue, bonus issue, merger, amalgamation, takeover etc. the framework shall be applicable on the new adjusted base price. The Exchange reiterated that this framework shall be in addition to all other prevailing surveillance measures being imposed by the Exchanges from time to time.
The Exchange reassured investors that the shortlisting of securities under aforesaid framework is purely on account of market surveillance and it should not be construed as an adverse action against the concerned company.
Common on all Exchanges, surveillance measures are used to put certain stocks that show unusual activities under watch. Some of the common ones are Graded Surveillance Measures (GSM), Additional Surveillance Measure (LT-ASM), Short-Term Additional Surveillance Measure (ST-ASM), etc. Circuit filters are also a kind of surveillance measure. These measures are not related to the fundamentals of the business aspect of stocks but largely based on volume or price movements.
Exchanges already have daily circuit filters for most stocks. They range from 2%-20%. For instance, if a stock has a 20% circuit and last closed at Rs100, then it can move only in the range of Rs80-120 on the next trading day.
Likewise, BSE has put another circuit which will be applicable over a longer period of time. So, in one week, the trading range will be Rs60-160, for a month Rs200-50 and for a quarter Rs300-30. Any price quoting beyond the trading range will result in no trade.
The ranges vary for stocks whose daily circuit limit is different. The reference price (in our example Rs100) will be decided on the time frame. For example, to calculate the weekly band, the close price of the last trading day of the preceding week will be considered, for the monthly band price on the last trading day of preceding calendar month and so on.
According to the additional clarification provided by BSE (restrictions applicable only on securities priced more than Rs10 rupees & market cap of less than Rs1000 cr), these restrictions will affect only a handful of stocks and, hence, the wild, knee-jerk overreaction that the market has seen in the small & mid cap stocks is unfounded.
Market experts point out that these price restrictions will discourage price manipulation leading to less volatility. Over the past couple of years, retail participation has increased significantly and it is important that they be protected from price manipulation.
As can be seen from the reasonable restriction limits, good companies with long-term wealth-generating potential will not be significantly affected by them.