Sebi mulls review of graded surveillance measures to improve transparency

Sebi mulls review of graded surveillance measures to improve transparency

The Securities and Exchange Board of India (Sebi) is reviewing the process to bring companies under the graded surveillance measure (GSM) with a view to improve transparency, said two people in the know.

GSM aims to tackle the surge in stock prices of companies with poor fundamentals or low market capitalisation witnessing abnormal price rises, and which are not supported by a significant improvement in financial or operational performance. A little more than 700 firms have come under GSM since it was introduced in February last year.

Experts reckon the criteria to select companies under GSM are not spelt out clearly and the mechanism is an overtly aggressive way of dealing with companies with poor fundamentals that are often targeted by fraudsters.

“In the current form, GSM is dangerously vague and hatched in secrecy," said Sumit Agrawal, partner, Suvan Law Advisors. “Price discovery should be a function of demand and supply. The regulator or the exchanges should not decide on a company’s fundamentals or its operations as long as disclosures about the company’s financials are in public domain."

The BSE, for instance, currently has close to 400 companies placed under different stages of GSM, of which 132 companies are under Grade-VI, where there are maximum restrictions.

“The investors are not aware of the criteria used to put companies under GSM. The regulator needs to put in place a mechanism that can warn investors about companies that are likely to be brought under GSM," said Pavan Kumar Vijay, managing director, Corporate Professionals.

The stocks under GSM have seen a significant dip in volumes as the stringent margining requirements deter investors from entering these scrips. For stocks under Grade-II of GSM, for instance, an additional surveillance deposit of 100 per cent of the trade value is collected from the buyer. The dip in volumes is also accompanied by a fall in their prices, making it that much more difficult for investors to make an exit.

An email sent to Sebi remained unanswered. Brokers have been caught off guard, too, as some have given exposure against these securities as collateral. “The biggest issue is that of margins being withheld for a month or two. On several occasions it’s the brokers who shell out these margins on behalf of their clients and their money is stuck," stock broker Alok Churiwala said.

Sebi’s US counterpart had initiated similar measures in 2012 and 2015 through “Operation Shell Expel". In 2012, the Securities and Exchange Commission removed a record 379 companies from trading in one day. In 2015, it suspended trading in 128 inactive penny stock shell companies to crack down on fraudsters dealing in micro-cap stocks.

According to current GSM norms, a quarterly review of securities that are under Stage-II and above are done to assess the relaxation of surveillance action. After the review, the applicable securities can be moved back from a higher stage to a lower stage in a sequential manner, say, from Stage-III to Stage-II.

Companies, investors or promoters can approach a high court under writ jurisdiction if they feel aggrieved by a GSM taken against a company by the market regulator or the exchanges. Investors also have the option of writing to Sebi directly asking it to reconsider its decision. The companies placed under GSM can also appeal to the Securities Appellate Tribunal (SAT) for relief. SAT, for instance, had stayed the Sebi directive against J Kumar Infraprojects and Prakash Industries.

The Business Standard, New Delhi, 16th January 2018