In a bid to limit volatility in micro-small companies, market regulator Securities and Exchange Board of India (SEBI) and exchanges have introduced enhanced surveillance mechanisms for companies having a market cap of less than ₹500 crore. The enhanced surveillance mechanism (ESM) framework will be effective from June 5, 2023.

“SEBI and Exchanges in a joint meeting have decided to introduce ESM framework for Micro-Small Companies (on main board with market cap less than 500 crores) with effect from June 5, 2023,” National Stock Exchange (NSE) said in a notification on June 2.

As per the notification, public sector enterprises and public sector banks will be excluded from the process of shortlisting of securities under ESM.

The securities will be selected under the ESM framework based on high-low price variation and close-to-close price variation.

The identification of securities based on entry criteria will be 100% margin from settlement cycle of trade date plus two days (T+2). “The trading for these securities will be settled through a trade for trade mechanism with a price band of 5% or 2% (if the scrip is already in the 2% band),” as per the notification.

For stocks already in stage I, trading will be permitted 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 noted that stage-wise review of securities will be on a weekly basis.

Under the mechanism, security shall be part of the framework for a minimum period of 90 calendar days. However, in case a security is under stage II of the Framework, it shall be retained under stage 2 for a minimum period of 1 month. After completion of 1 month, in weekly stage review if such security’s close to close price variation is less than 8% in a month, it can move to stage 1 of the Framework, it noted.

After the completion of 90 days, in a weekly stage review if such a security's close to close price variation is less than 8% in a month, it can move to Stage I of the ESM framework. The release noted that securities that complete three months in the framework shall be eligible for stage-wise exit if they no longer meet the entry criteria.

Last month, the SEBI released a consultation paper that proposed price band formulation for scrips in futures and options trading to strengthen volatility management and minimise information asymmetry. According to the consultation paper, the capital markets regulator has given proposals to curb longer trading hours as well as price movements. According to the proposal, SEBI said that if the price of any stock falls and rises by 10% in one session, the trading is to be suspended for an hour, instead of the existing cooling-off period of 15 minutes.

The development comes in the wake of the free-fall of Adani Group stocks after the U.S. short-seller alleged the port-to-energy conglomerate of stock market manipulation.

The consultation paper also proposed setting up of adequate surveillance and internal control systems (collectively referred to as ‘Institutional Mechanism’) by Asset Management Companies (AMCs) for deterrence of possible market abuse and fraudulent transactions in such transactions. The decision was taken months after the capital markets regulator barred 21 entities including Viresh Joshi, Axis Mutual Fund’s former manager, in relation to a front-running case in March this year. Last month, SEBI barred three individuals and two entities in relation to the front-running case in Life Insurance Corporation (LIC).

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