How does the GSM system work?
In simple terms, GSM alerts investors regarding plausible unethical activities with stock pricing by categorising companies into different groups or stages. These stages dictate the surveillance degree and the regulatory actions applicable to the stock.
SEBI tracks and monitors the stock prices of companies, and if it detects any irregular movements, it warns the exchange. If the increase in stock price is quite significant and does not align with the fundamentals of the company, it could indicate something nefarious, such as price rigging or the company participating in money laundering. SEBI will then alert the exchange to track the price action or suspend the trading of the company’s shares. Once the share of a company is placed on the surveillance list, it alerts the market participants to be careful while dealing in such securities.
Thus, several restrictions are imposed on GSM category stocks, and six stages are defined under the GSM framework. As the security goes from stage one to stage six, the surveillance action changes and a greater degree of restriction is imposed on trading. The stage-wise surveillance action is as follows.
- Stage one: In the initial phase, stocks enter the Trade-to-Trade monitoring stage, where speculative trading is curbed. Limited equity delivery is allowed with compulsory payment. A maximum of 5% price movement is permitted at this stage.
- Stage two: In the second stage, an Additional Surveillance Deposit (ASD) of 100% of the trade value is collected from the buyers for a minimum of five months.
- Stage three: From the third stage, trading can only be done once a week, and the ASD of 100% of the trade value must be deposited by buyers.
- Stage four: From the fourth stage, the deposit value increases, and buyers must deposit an ASD of 200% of the trade value.
- Stage five: During the fifth stage, buyers still dealing in GSM category stocks can trade only once a month and must deposit an ASD of 200% of the trade value.
- Stage Six: In the last stage, maximum restrictions are imposed, and trading is allowed once in the entire month without upward movement in price.
What are the factors affecting GSM?
Several factors influence the application of Graded Surveillance Measure (GSM):
- Financial performance and health: The company's financial health and performance metrics.
- Corporate governance and regulatory compliance: Adherence to corporate governance principles and regulatory requirements.
- Market behaviour and trading irregularities: Unusual price and volume movements or other market anomalies.
- Past track record and transparency: The company's historical performance, transparency, and disclosure practices.
Based on these factors, a comprehensive risk assessment is conducted.
Why is GSM in the stock market important?
Companies under GSM may need to implement comprehensive compliance programs. Investors tend to view companies with higher GSM grades as more stable and less risky. A company's GSM grade can impact its ability to participate in activities like share buybacks, bonus share issuances, and dividend payments.
Companies with low market capitalisation and trading volumes are more susceptible to GSM measures. Businesses that frequently violate regulations and fail to improve their GSM grade risk delisting from the stock exchange.
What are the Implications of GSM?
The implications of GSM are as follows:
- Higher gsm ratings (1-3): A higher GSM rating, typically between 1 and 3, indicates stability and can attract investors.
- Lower gsm ratings (4-7): Lower GSM ratings, between 4 and 7, may lead to trading restrictions and reduced stock liquidity.
- Blue-chip status: Companies with a Grade 1 GSM rating are often considered blue-chip stocks.
- Market integrity and transparency: GSM aims to maintain market integrity and transparency.
- Enhanced corporate governance: Companies under GSM may be required to appoint additional independent directors to improve corporate governance.
- Stricter internal controls: GSM companies may need to implement stricter internal controls and reporting mechanisms.
- Compliance officer: Companies may be required to appoint a compliance officer to monitor and report on legal compliance.
- Investor confidence: Lower GSM ratings can erode investor confidence.
- Delisting risk: Repeated GSM actions may lead to delisting from the stock exchange.
What happens to the stocks in the list?
So, what happens to the stocks placed on the list? Since the regulatory authority rolled out GSM in 2020, hundreds of companies have found their way onto the list. Based on pre-defined criteria, SEBI conducts half-yearly reviews to move securities in or out of the GSM framework. Additionally, for companies that find themselves in the higher stages, quarterly reviews of GSM stages take place, and applicable companies are moved back in a sequential method.
GSM supports transparency and fair market practices. At the same time, any company can challenge their entry into the list. Companies can approach the Securities Appellate Tribunal or the high court to dispute SEBI’s decision. If the company manages to win its appeal, the regulatory authority will lift all the trading restrictions.
Conclusion
This article answers important questions like, ‘What is meant by GSM?’ and ‘What is GSM in the share market?’. The Graded Surveillance Measure was introduced to protect the investors’ interests, restrict excessive speculation, and ensure market stability. By monitoring stock prices and identifying the ones that require higher level of caution, the GSM architecture maintains market integrity. Moreover, traders placing orders for stocks on the GSM list must provide explicit consent, acknowledging the regulatory actions and risks associated with these stocks.
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