What do you mean by GSM or GRADED SURVEILLANCE MEASURES

SEBI (Securities and Exchange Board of India), along with the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), has been introducing different enhanced pre-emptive monitoring methods such as price band reductions, periodic call auctions, and the transfer of securities to the Trade for Trade sector from time to time to improve market integrity and protect investors' interests.

The Graded Surveillance Measures on specified equities are a similar recent measure to keep track of securities that have had an abnormal price rise that is out of line with the company's financial health and fundamentals, such as earnings, book value, and price to earnings ratio (PE), among other things. The following constitute the primary goals of these initiatives.

• Alert and advice investors to be extra cautious while dealing in these securities and
• Advice market participants to carry out necessary due diligence while dealing in these securities.

The primary premise behind the GSM framework's many stages is to warn market players that they must be particularly cautious and diligent when trading in particular securities since a higher level of surveillance is required.

Currently, the Graded Surveillance Measures architecture has six phases, ranging from Stage I to Stage IV. For each level, a surveillance action has been defined. When security reaches a certain level, it will trigger the appropriate surveillance action. The Exchange will assign the security to a specific stage based on price movement and predetermined objective criteria. These 4 surveillance actions have been listed below:

For securities shortlisted under Stages II and above under graded surveillance measures, the 'buyer' of the security is responsible for paying the Additional Surveillance Deposit (ASD), which will be collected from the 'buying' Trading Member (s). ASD will be deducted on a T+1 basis from the aforementioned Trading Member's principal clearing account for the capital market sector(s). ASD shall be over and above existing margins or deposits levied by the Exchanges on transactions in such companies and shall be interest-free.

An important thing to note with respect to ASD is that it is not limited to institutional investors only but applies to all categories of clients.

The securities in the GSM list would not permanently be there. A quarterly evaluation of securities is conducted. Securities are moved from a higher stage to a lower stage in a progressive way based on criteria. If the security satisfies the criteria for moving to a lower stage of GSM, then ASD shall be refunded by the exchange. The following example can illustrate this:

For e.g., If the security moves from Stage II to Stage I, the security shall continue to remain in the Trade for Trade segment, but the ASD of 100% of the Trade Value shall be refunded. Accordingly, if a security moves from Stage IV (ASD - 200% of trade value) to Stage III (ASD - 100% of trade value), the security shall continue to remain in Trade for Trade segment with Trading permitted once a week, but the differential ASD of 100% of trade value collected shall be refunded. ASD shall not be refunded or adjusted even if the securities purchased are sold off.

In addition to quarterly review, there is a half-yearly review as well. The half-yearly review involves the identification of new securities, along with a review of securities under various stages of GSM based on the predetermined objective criteria. Securities can also be moved out of the GSM framework in this half-yearly review as well.

When the security is moved to different levels of monitoring, it is publicly published on the BSE and NSE websites as well as through circulars to stockbrokers on a daily basis. Furthermore, the exchanges also have the authority to appoint independent auditors to assess these companies' books of accounts and conduct forensic audits as needed.

Thus this acts as an advantage to small investors. This is because this could be an indirect indicator that the sudden growth in either the volume traded or the price increase is not in line with the fundamentals of the companies in question, and so small/retail investors are safeguarded from unwittingly becoming trapped in such stocks due to bad advice.

However, these announcements are frequently made on short notice and executed the next day, leaving individuals who have already invested in the stock with insufficient time to depart. There is, of course, the possibility of another risk. Even if time is granted, the stock price may see a sharp drop the next day due to news, initiating the lower price circuit and preventing an exit.

Criteria applicable for shortlisting into a GSM category:

Criteria I for Graded Surveillance Measures:

1. Securities with latest available Net worth (Share Capital + Reserves & Surplus - debit balance in P&L) less than or equal to Rs. 10 crores;
   AND
2. Securities with latest available Net Fixed Assets (Tangible Assets + Capital Work in Progress) less than or equal to Rs. 25 crores;
   AND
3. Securities with PE greater than 2 times PE of Benchmark Index (Nifty 500) OR negative PE.

Criteria II for Graded Surveillance Measures:

1. Securities with a full market capitalization of less than Rs. 25 crores;
   AND
2. Securities with PE greater than 2 times PE of Benchmark Index (Nifty 500);
   OR
3. Securities with negative PE, the following should be considered:
• P/B (Price to Book) value of scrip greater than 2 times the P/B value of Benchmark Index (Nifty 500)
  OR
• P/B value is negative

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