Introduced in 2018 as a regulatory initiative by SEBI and recognised stock exchanges, Additional Surveillance Measures (ASM) aims to protect investors and maintain market integrity by monitoring highly unpredictable stocks. SEBI identifies and lists highly volatile and risky stocks under ASM, implementing measures to reduce associated risks.
Securities featured in the ASM list are those currently subjected to scrutiny due to their fluctuating prices, varying trading volumes, and levels of volatility. The purpose behind placing these stocks on the ASM list is to raise investor awareness and provide them with alerts when dealing with such stocks. However, the ASM framework’s sole intention is centred around market surveillance and should not be misconstrued as an action directed against the concerned companies.
What is ASM (Additional Surveillance Measures)?
ASM in the stock market stands for ‘Additional Surveillance Measure’. ASM is a regulatory mechanism used by stock exchanges to track and monitor trading activities of specific securities more closely. This regulatory measure helps uphold overall market integrity, minimise risks, and protect the interest of investors.
The securities that come under the scrutiny of ASM are listed in the “ASM list.” This list includes securities that exhibit specific characteristics, like unusual price and volume variations or high levels of volatility. These factors are analysed based on objective parameters such as price changes and trading volumes. The securities on the ASM list are divided into different stages or categories.
In the first phase of ASM — also known as ASM stage 1, the following measures are implemented: a) A requirement of 100% margin, and b) A daily price band of 5% or less. As for the second phase – ASM stage 2, if the security is moved into a Trade-to-Trade settlement, transactions will be settled on a gross basis, meaning delivery-based transactions will be mandated.
Applicability of long-term ASM
The applicability of long-term ASM becomes clear on assessment of the following pointers:
1. Selection of securities
Long-term ASM in the stock market is applicable to securities that meet certain predetermined criteria. These criteria are set by stock exchanges and can include factors like trading volumes, price volatility, and market cap. Generally, stocks that display higher volatility or are considered more prone to manipulation are picked for long-term ASM.
2. Longer monitoring periods
As the name suggests, long-term ASM is applicable for an extended duration. Surveillance on the security continues for a prolonged period until the exchange decides to lift the ASM mandate based on the market conditions and the security’s performance.
3. Stricter regulations
Stocks selected for long-term ASM have to endure stricter regulations like higher margin requirements, limits on intraday trading positions, etc.
4. Mitigation of risks
Since restrictions help prevent excessive price movements, long-term ASM in the stock market helps mitigate risks for investors and the overall market. This measure becomes extremely crucial in minimising risk when trading under intensely volatile and sensitive market conditions.
5. The integrity of the market
Imposing long-term ASM helps exchanges prevent manipulative activities and excess speculations, preserving the overall integrity of the market.
6. Awareness among investors
Investors should be aware of what are the ASM lists in the stock market. Reviewing the stocks included on these lists can help investors understand the risks associated with certain investment decisions and in turn, aid them to tailor their strategies accordingly.
7. Periodic review
The long-term ASM status of a security in the stock market is subject to regular review. The stock exchange periodically examines the behaviour and performance of the selected securities to ascertain if the long-term ASM status needs to be revoked, modified, or continued.
Criteria to determine ASM list stocks
The process of selecting stocks for the ASM in the stock market involves a thorough evaluation based on certain criteria. These criteria help identify securities that might require extra surveillance and monitoring due to potential issues:
1. Close-to-close price variation
This criterion assesses how much the closing price of a stock varies from one trading day to the next. A significant and abrupt change in the closing price might indicate irregular trading activities or market manipulation. Stocks that exhibit unusually high close-to-close price variations are considered under ASM in the share market.
2. Client concentration
Client concentration refers to distributing a stock’s ownership among different investors or clients. If a stock is heavily concentrated in the hands of a few investors, it can lead to concerns about market manipulation or insider trading. Stocks with high client concentration may be considered for ASM monitoring to ensure fair trading practices.
3. Delivery percentage
The delivery percentage represents the portion of trades where actual shares are transferred from one investor to another, as opposed to trades where shares are bought and sold without physical transfer. A low delivery percentage may indicate speculative trading or short-term speculation. Stocks with consistently low delivery percentages might be flagged for ASM in the stock market to prevent excessive speculative activity.
4. High-low variation
High-low variation assesses the difference between the highest and lowest trading prices of a stock within a single trading session. A significant high-low variation might suggest extreme volatility or manipulation. Stocks with unusually high fluctuations between daily high and low prices could be considered for ASM monitoring.
5. Market capitalisation
Market capitalisation is the total value of a company’s outstanding shares in the stock market. Larger companies with higher market capitalisation tend to have more stable stock prices and trading activities. However, sudden and unusual changes in market capitalisation might raise concerns. Stocks experiencing rapid changes in market capitalisation could be evaluated for potential inclusion in the ASM list.
6. Number of unique PANs
PAN (Permanent Account Number) is a unique identification number assigned to taxpayers in India. Many unique PANs holding a stock indicate broader investor participation and distribution. On the other hand, a low number of PANs can suggest concentrated ownership. Stocks with a low number of unique PANs could undergo ASM monitoring.
7. Price-to-earning ratio (P/E)
The Price-to-earning ratio is a measure of a stock’s valuation. It compares the stock’s price to its earnings per share. A very high or low P/E ratio might indicate overvaluation or undervaluation. Stocks with extreme P/E ratios could be evaluated for potential inclusion in the ASM list.
8. Volume variation
Volume variation evaluates the changes in trading volumes for a stock over a period. Drastic changes in trading volumes can signify sudden interest or disinterest in a stock. Stocks with unusual volume variations might be considered for monitoring under ASM in the share market to ensure that trading activities are transparent and fair.
However, the subsequent securities are not to be considered for inclusion in the ASM list:
- Public Sector Enterprises and Public Sector Banks (PSU)
- Securities for which derivative products are accessible
- Securities that are already subject to Graded Surveillance Measures (GSM)
- Securities that are already placed under Trade for Trade regulations
Different types of regulatory measures under ASM
The different types of regulatory measures under ASM can be categorized as follows:
1. Price bands
Under this type of ASM regulation, price limits are placed on securities to restrict their price movements within a specific range. Price bands work to prevent sudden price fluctuations and cap excessive volatility.
2. Higher margin requirements
Due to a higher margin requirement, investors have a larger financial stake in their trades. This lowers the risk of speculative trading and price manipulations.
3. Graded surveillance measure
Commonly known as GSM, Graded Surveillance Measure classifies securities on the basis of their risk profiles. Surveillance measures are applied in a graded manner depending on the risk category of the security.
4. Additional disclosure obligations
These additional obligations require certain stocks on the ASM list to make add-on information available to the stock exchange and investors, ensuring greater transparency.
5. Trading restrictions
Some securities that are listed under ASM in the stock market may have additional trading restrictions. These restrictions can include intraday trading limits, limits/restrictions on short selling, and minimum holding period mandates.
6. Enhanced monitoring
Securities placed under enhanced monitoring are closely monitored by the stock exchange to detect any suspicious activities. Generally, stock exchanges scrutinise everything about the security, including its trading volumes, market-related data, order flows, etc.
ASM stages
These stages ensure that securities are closely monitored and regulated to prevent malpractices and promote transparent trading. The stages of ASM are as follows:
Stage |
Description |
Stage 1 |
Identifying securities that meet specific predefined criteria, such as unusual price movements or trading volumes. |
Stage 2 |
Imposing measures like price bands, increased margin requirements, and additional disclosures to mitigate risks. |
Stage 3 |
Continuously monitoring and reviewing identified securities to ensure compliance and detect emerging issues. |
Stage 4 |
Modifying or lifting measures based on the securities' performance and market conditions. |
Stage 5 |
Ongoing monitoring and adjusting of measures to maintain market stability and investor protection. |
Impacts of ASM on investors
Implementing Additional Surveillance Measures (ASM) has several effects on investors, influencing their trading behaviour, market stability, and overall sentiment. The impacts of ASM on investors can be summarised as follows:
1. Restriction of speculative trading
Stricter trading measures, such as heightened margin requirements and price bands, make speculative trades more expensive. This forces traders and investors to adopt a more prudent approach to investment decisions, often necessitating thorough analysis before trading.
2. Enhanced market stability
By curbing excessive price fluctuations and speculative trading, ASM contributes to a more stable market. This stability is advantageous for long-term investors who prefer predictable market conditions for making well-informed investment decisions.
3. Stock liquidity effects
While ASM aims to protect investors from sudden price swings, it may inadvertently reduce liquidity for the monitored shares. This could impact the ability of investors to execute large transactions swiftly without causing significant market movements.
4. Investor sentiment and confidence
When investors observe regulatory bodies actively working to prevent market manipulation, their confidence is bolstered. This positive sentiment can attract more market participants, fostering a dynamic trading environment. However, the designation of a stock as being under ASM might send negative signals, deterring some potential buyers from investing in those stocks.
Significance of ASM-listed stocks
Stocks under ASM in the stock market are subject to additional scrutiny and restrictions. Inclusion of stocks on the ASM list conveys that they meet certain predetermined criteria like susceptibility to manipulation or high volatility. The additional surveillance of these stocks serves as a cautionary signal for investors, alerting them to the potential risks associated with these securities. This encourages a more informed decision-making approach. ASM lists help stock exchanges regulate and actively monitor manipulative or speculative activities, creating a level playing field for investors and maintaining market integrity. Additionally, ASM protects investor interests by safeguarding against sudden and abnormal price movements in highly volatile stocks.
Investment strategies under ASM
Investing in ASM-listed stocks requires careful planning to manage risks and maximise returns. Key strategies include:
1. Diversification
Diversify your portfolio across various asset classes, such as equity, debt, and hybrid funds. This approach reduces the impact of volatility in ASM-listed stocks.
2. Risk management
Use stop-loss orders and invest in lower-volatility securities. Regularly review and adjust your risk parameters to adapt to changing market conditions and ASM developments.
3. Long-term focus
Focus on long-term investments to mitigate short-term fluctuations. Consider financial instruments like Aditya Birla Capital’s Retirement & Pension Policy, which offers financial security and tax benefits.
4. Professional advice
Consult financial advisors for personalised strategies. They provide insights on regulatory changes and help develop robust investment approaches.
These strategies help manage risks and enhance potential returns when dealing with ASM-listed stocks.
Conclusion
Securities eligible under ASM stage 1 and beyond adhere to more stringent regulations. These stocks cannot be pledged and are ineligible for intraday leverages like cover or bracket orders. To underscore this regulatory aspect, it’s important to note that 100% of the traded value of such stocks is held as margins. Additionally, these securities are subjected to a 5% circuit filter, ensuring that their share price remains within a 5% fluctuation range. This controlled movement restricts potential gains or losses for traders, ultimately fostering stability in the stock’s price. This stability particularly benefits long-term retail investors.
In essence, ASM’s role in monitoring and regulating stocks promotes stability and safeguards the interests of investors, especially those with a long-term perspective.
