Understanding regulatory mechanisms like GSM (Graded Surveillance Measure) is essential for any investor or trader in the stock market. Many retail investors often face situations where they are unable to sell certain stocks or experience sudden trading halts. These occurrences are usually the result of regulatory actions taken by exchanges or SEBI to curb price manipulation and protect investors.
The Securities and Exchange Board of India (SEBI) plays a vital role in monitoring and regulating the Indian stock market. Although NSE and BSE have their own compliance systems, SEBI oversees overall market conduct, focusing on protecting retail investors. In recent years, stock manipulation, especially in penny stocks, has increased significantly, often promoted through social media or WhatsApp groups. Many new investors, driven by the hope of quick returns, become victims of these tactics.
To address this issue, SEBI introduced two important mechanisms: ASM (Additional Surveillance Measures) and GSM (Graded Surveillance Measures). These tools are designed to monitor and regulate abnormal stock behavior.
ASM is triggered when stocks show unusual price movements or volumes without any significant fundamental news. It acts as a warning system, signaling that the stock might be under speculative or manipulative pressure. Stocks placed under ASM are put on a watchlist, and although trading is not halted, certain restrictions may be applied.
GSM is a stricter regulatory framework compared to ASM. It is meant to warn and protect investors by identifying companies whose stock prices are not in line with their financial fundamentals. This includes discrepancies between the stock price and key financial indicators such as earnings, book value, fixed assets, net worth, PE ratio, and market capitalization. For instance, if a stock priced at Rs. 10 suddenly shoots up to Rs. 1,000 without corresponding growth in business or earnings, it raises suspicion.
When a stock is listed under GSM, several restrictions are imposed. First, it is moved to the trade-for-trade category, which means intraday trading is not allowed. Investors must take delivery of shares, and margin trading or leverage is restricted. In some cases, a surveillance deposit or additional margin is required to trade in these stocks. Further restrictions may include limiting trading to once a week or applying strict price bands, usually capped at 5%.
The selection criteria for GSM typically include factors such as low reserves (e.g., less than Rs. 10 crore), low market capitalization, and poor financials that do not support the current market price. Exchanges use multiple filters to identify and list such stocks under GSM. These lists are periodically reviewed and updated.
GSM is categorized into multiple stages (Stage I to Stage IV), each representing increasing levels of scrutiny and restriction. Stage 1 may impose 100% margin and tight price bands. Further stages may involve trading suspensions, compulsory deposits, or even temporary delisting from exchanges. Each stage serves as a warning for investors to exercise caution.
It’s important to note that just because a stock is listed under GSM doesn’t necessarily mean it’s fraudulent. Some companies recover and eventually exit the GSM framework after improving their fundamentals. However, GSM inclusion is always a signal to conduct detailed due diligence before making any investment.
These measures mainly apply to penny stocks where manipulation is most common. Well-established companies rarely appear on GSM lists. Therefore, retail investors, especially those dealing in low-cap or micro-cap stocks, must remain alert and informed.
GSM is SEBI’s way of shielding retail investors from excessive speculation and manipulated price action. Before investing in a GSM-listed stock, one should conduct thorough research, avoid acting on social media tips, and fully understand the limitations imposed by such surveillance.
You can find the latest GSM-listed stocks on the official NSE website. Staying updated with verified sources and continuing financial education is essential to navigating the stock market safely.
Disclaimer:
This article is for informational purposes only and does not constitute financial advice. Investors should do their own research or consult a certified financial advisor before making any investment decisions. The author and website are not liable for any losses arising from investments based on this article.
