Queries on selection of firms under graded surveillance measure

Experts say method to select companies in this list is not spelt clearly by the exchanges or Sebi

The process to bring companies under the graded surveillance measure (GSM) adopted by exchanges and the Securities and Exchange Board of India (Sebi) has come under question from various quarters. 

Experts say the method to select companies in this list is not spelt clearly by the exchanges or the regulator. Also, that companies brought under surveillance do not have a proper redressal mechanism. 

A little more than 700 companies have come under GSM since it was introduced this February.

GSM aims to tackle the surge in cases of companies with poor fundamentals or low market capitalisation witnessing abnormal price rises, not supported by a significant improvement in financial or operational performance. The aim of the regulator is to detect unusual trading activities at a very early stage.

The criticism is that the regulator might be going too far. “Marketmen are at a loss to know the criteria used to select the names that have found their way to the GSM list. Brokers have been caught offguard, too, as some may have given an exposure against these securities as collateral,” said Alok Churiwala, a broker. 

Sebi’s US counterpart initiated similar measures in 2012 and 2015, through an “Operation Shell Expel”. In 2012, their 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 micro-cap stock fraudsters.

“This seems an aggressive plan to sweep away companies with poor fundamentals, often targeted by fraudsters. While the object is noble, Sebi’s process might be questionable,” said Sumit Agrawal, partner, Suvan Law Advisors and an ex-Sebi official. 

In the current norms, a quarterly review of securities (under stages-II & above of GSM), based on redefined objective criteria, will be done to assess the relaxation of surveillance action. If qualified, 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 may only approach a high court under writ jurisdiction if they feel aggrieved by a GSM taken against a company by Sebi or the exchanges. Investors also have the option of writing to Sebi directly, asking it to reconsider its decision.

“Companies may litigate on the process of selection, as well as natural justice. From their point of view, should a regulator decide if a company might turn out to be a mischievous one eventually? Anyone who had bought shares of such companies, which anyone was legally entitled to before the passing of this order, would be stuck through no fault of their own. It will be difficult to offload such stocks,” said Agrawal.