NSE over the weekend decided to introduce additional surveillance measures for cos that are undergoing insolvency resolution process
If you are stuck with stocks that have come under the ‘Additional Surveillance Mechanism’ (ASM), you have nothing to fear, say experts. They see a silver lining which investors are missing out.The National Stock Exchange (NSE) over the weekend decided to introduce additional surveillance measures (ASM) for companies that are undergoing
insolvency resolution process (IRP) as per the Insolvency and Bankruptcy Code (IBC). The exchange has listed 60 companies that are a part of this process. These came into effect from Monday.
These include: ABG Shipyard, Amtek Auto, Bhushan Steel, IVRCL, Jaypee Infratech, Monnet Ispat & Energy, Lanco Infratech, Orchid Pharma, Ruchi Soya Industries, Viceroy Hotels, Alok Industries, Tecpro Systems and Zenith Computers.
Last week, the BSE listed 75 companies under ASM. In the short term, the measures introduced by exchanges resulted in a knee-jerk reaction on D-Street, but in the long run, it will protect retail investors from extreme volatility in the stock price, experts stated.
“Recently, stocks in both the BSE and NSE came under the ASM framework to curb extreme volatile price swings and excessive speculation. Although the exchange communicated that it should not be construed as an adverse action against the concerned fundamentals of the company. However, investor sentiment was dampened after the announcement,” Dinesh Rohira, Founder & CEO, 5nance.com, said.
In the short term, he sees companies under ASM witnessing a setback due to adverse sentiments. “In the long-run, the market will be well equipped with risk management tools to protect retail investors from extreme price volatility.”
What is ASM?
“In continuation with various surveillance measures already implemented, the Securities and Exchange Board of India (SEBI) and exchanges, pursuant to discussions in various joint surveillance meetings, have decided that along with the aforesaid measures there shall be Additional Surveillance Measures (ASM) on securities with surveillance concerns based on objective parameters: price variation, volatility etc,” the NSE circular stated.
The shortlisting is based on the following parameters: high low price variation, client concentration, number of price band hits, price variation between closings and P/E ratio.
Commenting on the same, Nikhil Kamath, Co-founder, Zerodha, said, ““Additional surveillance measures is a new category where stocks will be moved to control the inherent leverage which has become a part of the trading plethora today. This will depend on how big the variation is between the high and low prices and the frequency with daily limits are breached.”The surveillance actions applicable to the shortlisted securities is as under:
1. Securities shall be placed in the price band of 5%
2. Margins shall be levied at the rate of 100%
The shortlisted securities shall be further monitored on pre-determined objectives and would be moved into trade-to-trade segment once the criteria get satisfied.
How will investors be impacted?
If one holds a stock that has come under ASM framework, nothing much will change with respect to trading, but low leverage could reduce volumes in the counter. Experts said one won’t be able to use those shares as collateral.
Given the 5 percent price band, the maximum possible uptick or downtick in these scrips will be up to 5 percent which will help reduce volatility.
“Trade will pretty much remain the same, but lower leverage could reduce volumes. Collateral may not be provided for stocks under this category, so liquidity will reduce,” Kamath said.
The ASM framework will be used in conjunction with other prevailing surveillance measures imposed by the exchange. As this exercise is purely on account of market surveillance and doesn’t question the fundamental aspect of a company, it is unlikely to impact investors substantially, experts stated.
“Under BSE’s 5 percent price band, which was effective last week, the maximum possible uptick or downtick in these scrips will be up to 5 percent. On all these securities, 100 percent of the total order value should be deposited as margin before executing a trade,” Rohira said. “In the long term, investor will be protected especially from a wide downward swing in prices.”
In nutshell, this measure is basically scrutinising of trades. It should not be misconstrued as any action against the company but only to clear malpractice in certain counters, if any, experts said.“From a preventive corrective action move, it is welcomed. The only thing which can be improved was the timing of implementations. Once all such measures are taken and positions are cut, it will eventually bring down volatility,” Bonanza Portfolio said in a research note. “If stocks are supported by great businesses, then investors should patiently wait for this storm to pass by.”