Enhanced Surveillance Measures (ESM): A Gloomy Framework & Unfair To Micro, Small-Cap Companies

The enhanced surveillance measure for micro and small-cap companies, put in place by the market regulator and exchanges from June 5, is in fact unfairly targeting one segment of the stocks. The new measure will cover companies on the main board with market cap less than Rs 500 crore and will be effected in two stages. For both stages, the companies will be shortlisted based on variations in high and low prices, or in close-to-close prices. For stage one or ESM-I, price variations over three to six months will be considered. In stage two or ESM-II, companies already in stage one and significant price variations over five consecutive trading days or over one month will be included. The surveillance mechanism should allow for trading of stocks and what if somebody wants to sell due to various reasons. The best practice would have been that the regulators penalise only the errant players whereas this action even penalises investors.

- Shivanand Pandit

To improve market reliability and protect the welfare of investors, the regulator of the capital market in India, the Securities and Exchange Board of India (SEBI), and stock exchanges Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have been hosting numerous superior preventive surveillance actions namely a reduction in price band, transfer of securities to Trade for Trade segment and periodic call auction from time to time.

In addition to several surveillance actions by now put into action, the SEBI and stock exchanges, according to debates in joint surveillance summits, have decided that together with the aforementioned actions there shall be Enhanced Surveillance Measures (ESM) on Micro-Small Companies (on main board with market capitalization below ₹500 crores) based on objective parameters such as Price variation, Standard Deviation, etc. The framework to prevent volatility in small-cap counters is applicable from June 5, 2023.

Know your ESM

According to the announcement, public sector organizations and public sector banks will be exempted from the procedure of shortlisting securities under ESM. The securities will be chosen under the ESM framework based on high-low price variation and close-to-close price variation. The recognition of securities based on entry norms will be 100% margin from the settlement cycle of the trade date plus two days (T+2). As per the notification, the trading for these securities will be settled through a trade-for-trade mechanism with a price band of 5% (if the scrip is already in the 2% band) or 2%. For securities already in stage I, trading will be allowed once a week with periodic call auctions. The trading for these securities will be settled through a trade-for-trade mechanism with a price band of 2%. The notification stated that stage-wise scrutiny of securities will be weekly.