SEBI ban on 331 shell companies: Here is how regulator monitors restricted stocks

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Updated: August 14, 2017 10:53:04 AM

Last week, India’s capital markets regulator SEBI shocked investors with its order to suspend trading in 331 suspected shell companies’ shares. Here is how the GSM framework for monitoring of securities works.

Out of 331 firms identified by Sebi for action, 162 were actively traded on BSE; 48 were traded on the NSE. (Image: Reuters)

Last week, India’s capital markets regulator SEBI shocked investors with its order to suspend trading in 331 suspected shell companies’ shares, putting them on a strict watch under its Graded Surveillance Measure (GSM) framework. The regulator asked the stock exchanges to place all the 331 companies in the stage VI (six) of Graded Surveillance Measure, restricting the trade in these securities to once in a month with additional deposit.

The regulator’s directive came after the corporate affairs ministry shared a list of 331 listed companies that are suspected to be shell entities. Out of 331 firms identified by Sebi for action, 162 were actively traded on BSE; 48 were traded on the NSE. The rest have already been suspended by the bourses on account of irregularities.

SEBI (Securities and Exchange Board of India) and stock exchanges had introduced the graded surveillance measure framework in February this year to monitor securities which have witnessed abnormal price rise not commensurate with financial health and fundamentals such as earnings, book value, fixed assets, net worth, P/E multiple, etc.

The GSM framework for monitoring of securities came into force with effect from March 14, 2017. Investors are expected to be more cautious while trading in these companies’ shares. SEBI had then said that “all market participants dealing in identified securities have to be extra cautious and diligent as exchanges and SEBI may at an appropriate time subject to satisfaction of certain criteria lay additional restrictions.”

The ‘additional restrictions’ could include placing / continuing securities in a trade-to-trade category, and be requiring additional amount as surveillance deposit, which shall be retained for an extended period. Other limitations may include restricting trading to once in a week, once in a month or even freezing of price on an upper side of trading in securities, as may be required. Also, if required, either SEBI or the stock exchange concerned may introduce any other surveillance measure as deemed fit in the interest of maintaining the market integrity.

At present, there are six stages defined under GSM framework. Surveillance action has been defined for each stage. Once the security goes into a particular stage, it shall attract the corresponding surveillance action. The security shall be placed in a particular stage by the stock exchange based on monitoring of price movement and predefined objective criteria. Here are stage-wise surveillance actions under GSM:

  1. Transfer to trade for trade with price band of 5% or lower as applicable
  2. Trade for trade with price band of 5% or lower as applicable and Additional Surveillance Deposit (ASD) of 100% of trade value to be collected from Buyer
  3. Trading permitted once a week trading and ASD 100% of trade value to be deposited by the buyers (Every Monday)
  4. Trading permitted once a week trading with ASD 200% of trade value to be deposited by the buyers (Every Monday)
  5. Trading permitted once a month trading with ASD 200% of trade value to be deposited by the buyers (First Monday of the month)
  6. Trading permitted once a month with no upward movement in price of the security with ASD 200% of trade value to be deposited by the buyers (First Monday of the month)

However, a review process based on pre-defined criteria for moving securities in/out of GSM framework shall be carried out twice a year.

 

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