Graded Surveillance Measures

Some listed shells trade at prices their accounts cannot justify — tiny net worth, negligible assets, and a share price on a multiple that makes no sense. The exchanges cannot force anyone to stop buying them, but they can make it slow, expensive and conspicuous.

That is what the Graded Surveillance Measures framework does. A security meeting the criteria is listed publicly, which alerts investors to be extra cautious and warns market participants to carry out extra due diligence, and the exchange then layers on restrictions that make the stock difficult to trade in and out of.

GSM targets securities with low market capitalisation or net worth where the valuation is not commensurate with the business fundamentals.

The workbook gives two criteria:

• Net worth Rs 10 crore or less and net fixed assets Rs 25 crore or less, while trading at a negative P/E or at a P/E of more than twice the benchmark index. This limb excludes securities already under suspension, PSUs, index constituents, shares that have paid dividends in the previous three years, companies that went through an IPO within the last year, securities in the derivatives segment, securities with significant institutional holding, and those undergoing a merger or demerger under a scheme of arrangement.
• Market capitalisation below Rs 25 crore, trading at a P/E more than twice the benchmark index, or at a negative P/E with a P/B that is negative or more than twice the benchmark's.

The restrictions the exchanges may impose: placing the security in the trade-for-trade category, so only delivery-based trading is permitted; requiring a surveillance deposit; reducing the price band; increasing the margin requirement; and freezing the price on the upside.

The companion framework, ASM, works on a different trigger: price and volume variation and the share of volume traded by the top 25 clients. ASM does not apply to a security already under GSM.

A smallcap on the exchange:

Net worth   Rs 8 cr  ≤ Rs 10 cr    ✓
Net fixed assets Rs 19 cr ≤ Rs 25 cr ✓
2 × benchmark P/E = 44×; actual 240× ✓

All three limbs are met, and none of the exclusions applies — no dividend in three years, no institutional holding, not in the index or the derivatives segment. The security goes into GSM.

What that does to a holder of 10,000 shares (Rs 9.60 lakh at Rs 96). Trading becomes delivery-only, so no intraday exit. A surveillance deposit is required. The price band is narrowed and the margin is raised, and the price is frozen on the upside. In a stock that traded 40,000 shares a day before the flag and a fraction of that after it, unwinding Rs 9.60 lakh inside a narrowed band can take weeks — and each session can only move the price down.

The arithmetic that put it there: for the share to trade at 44× — the threshold — on EPS of Rs 0.40, the price would have to be Rs 17.60. It is at Rs 96.

Chapter 14 (Legal and Regulatory Environment, section 14.5.1) sets out GSM, and 14.5.2 sets out ASM. The recurring question is which framework is triggered by what — GSM by valuation out of line with fundamentals, ASM by price and volume variation and client concentration — and what restrictions each carries.

• GSM is about valuation; ASM is about price and volume behaviour. That single distinction carries most of the marks in section 14.5.
• ASM does not apply to a security already under GSM (Chapter 14.5.2), along with trade-for-trade securities, F&O securities and PSUs. The two frameworks are not stacked.
• GSM is not a penalty or a finding of wrongdoing. It is a caution flag plus trading friction, and a security leaves it when it stops meeting the criteria at review.
• The exclusion list attaches to the net worth / net fixed assets limb. PSUs, index members, recent IPOs, F&O stocks, dividend payers of the last three years and companies in a scheme of arrangement sit outside it.
• The ASM margin numbers are examinable: margin rises to 80% on shortlisting and tightens to 100% as further criteria are met.
• The restrictions are a menu the exchanges may impose, not an automatic full set. An option asserting that every GSM stock is frozen on the upside overstates it.