Securities market surveillance

Rules vs. discretion in market surveillance:evidence from India

Aggarwal, Bhatia, Zaveri in their research paper talks about the new surveillance measure which is Graded Surveillance Measure (GSM). The reason behind introducing the measure was to restrict the trading activity of the securities whose share prices are not commensurate with the health of the firm.

There is a list of securities which is published quarterly. This framework alerts the investor before placing order on these securities. There are in total 6 stages in the GSM framework the securities are placed in these stages according to the criteria and also the securities are also changed from 1 stage to the other on quarterly basis.

The firms whose net worth is less than or equal to 10 crores and Net Fixed Assets less than or equal to Rs 25 crore enter in Stage 0 while the firms with full market capitalization of 25 crore or less are included in the Stage 1. There are more strict restrictions as we move from Stage 0 to Stage 6.

The study includes 121 securities which entered and exited the GSM framework during the study period from 2017 to 2019. The securities are included in the GSM Stages depending upon the share price and the company’s net worth. The low investor confidence in the market leads to low liquidity, high trading costs. More than half of the securities  that exited the surveillance continue to exhibit the same pre – defined characteristics.

The hypothesis of the study was that after the securities are included in the list the stock prices fall down. This hypothesis has been accepted by enough research evidence.

Source : https://emergingmarketsconference.org/PDF/CONF_2020/Aggarwal_Bhatia_Zaveri_2020.pdf

The summary was prepared by Dishant Savla

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