Enhanced Surveillance Measure (ESM) for Micro-Small Companies

June 5, 2023

Stock exchanges BSE and NSE (National Stock Exchange) have taken a significant step to curb volatility in small-cap counters by implementing an Enhanced Surveillance Measure (ESM). This regulatory framework aims to ensure stability and transparency in the market while safeguarding investors’ interests.

Effective Date

The Enhanced Surveillance Measure (ESM) will come into effect from June 5, marking a crucial milestone in the regulatory landscape of stock exchanges. This mechanism will be instrumental in monitoring and controlling the price fluctuations of small-cap companies, providing stability to the market.

BSE and NSE Join Forces

Both BSE and NSE have jointly implemented the enhanced surveillance mechanism, demonstrating their commitment to maintaining a fair and secure trading environment. By collaborating on this initiative, the leading stock exchanges aim to strengthen the overall market structure and bolster investor confidence.

Market Cap Threshold: Less than ₹500 crore

Under the ESM framework, companies with a market capitalization of less than ₹500 crore will be subject to enhanced surveillance. This criterion allows for targeted monitoring of small-cap counters, which are often more susceptible to price volatility and speculative trading.

Parameters for Shortlisting Securities

The ESM framework incorporates specific parameters to shortlist securities for surveillance. High-low price variation and close-to-close price variation are key factors considered during the selection process. These metrics enable the identification of securities that display excessive price swings, warranting closer monitoring and potential regulatory intervention.

Trading with Price Bands

Securities falling under the ESM framework will have trading conducted through a trade-for-trade mechanism. A price band of 5% will be applicable for most securities. However, for securities that are already in the 2% price band, the trading will be settled within the existing 2% range. This mechanism ensures a controlled trading environment for these securities, limiting sudden and drastic price movements.

Excluded Securities

The ESM framework excludes certain types of securities from the shortlisting process. Securities of public sector enterprises, public sector banks, and those on which derivative products are available are not subject to this enhanced surveillance. This exclusion aligns the surveillance mechanism with the specific dynamics and requirements of small-cap companies.

Minimum Period of Surveillance

Securities included in the ESM framework must undergo surveillance for a minimum period of three months. This duration allows for a comprehensive assessment of their trading patterns, price movements, and overall market behavior.

Transition from Stage II to Stage I

Securities identified under Stage II of the ESM framework must undergo a minimum surveillance period of one month. If, during the weekly stage review, a security demonstrates a close-to-close price variation of less than 8% within a month, it will transition from Stage II to Stage I. This transition acknowledges the security’s improved stability and may lead to a reduction in regulatory scrutiny.

Promoting Stability and Investor Confidence

By introducing the Enhanced Surveillance Measure (ESM), stock exchanges BSE and NSE are taking proactive steps to promote stability, transparency, and investor confidence in the market. This framework ensures that small-cap counters, often characterized by higher volatility, are closely monitored and regulated, ultimately fostering a more secure trading environment.

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