GSM, or graded surveillance measure, sounds like a military operation. It is a surveillance technique that SEBI uses to protect the interests of honest investors. The market watchdog BSE monitors over 900 companies on the GSM List.
Graded surveillance is a way to monitor the price and demand rises in company stock that are not proportional to the financial health or fundamentals of the company.
This method separates companies into different grades in order to alert investors about possible unreliable stock price movements. When the regulator notices that the stock price has increased in an abnormal manner, the regulator will trigger the alarm. This could lead to the company being classified as a "shell company". Investors will learn which stocks to avoid.
SEBI (Securities and Exchange Board of India), in its role as market regulator, introduces several surveillance methods to increase the integrity and efficiency of India's market and protect investor interests. To curb unethical behavior, SEBI uses the periodic call auction, a reduction of price and transfer securities to Trade to Trade segment.
If the SEBI suspects that a company's stock price has been rising in unusual ways, it may notify the exchange. Price rigging can occur when there is a substantial rise in stock prices that is not supported by financial health and fundamentals. These companies could be used to launder money. SEBI may order the suspension of trading or monitor price action in such cases. Investors are advised to be more cautious when dealing with company shares that have been placed on the surveillance list.
It takes six steps to place stocks under the "shell company" list. Each step brings about an increase in trading restrictions.
The stocks are then placed under Trade to Trade surveillance. This monitors any speculative trading and allows restricted delivery of equities upon payment of consideration. This stage allows for a 5 percent increase in stock price.
Each stage brings more restrictions. Stocks entering the second stage require that buyers pay 100 percent of trade value as surveillance deposit for at least five months. The third stage imposes a trading restriction, which is only limitedly permitted. Buyers who wish to buy stocks placed in the fourth or fifth stages must deposit 200 percent of the trade volume.
The sixth stage is the most restrictive. trading is allowed once per month and there is no price movement.
In February 2020, SEBI introduced graded surveillance measures. Until then, nearly 700 companies have been added to the GSM List. What does this mean? Are stocks allowed to remain on the list?
Sometimes, not always. SEBI conducts a review twice per year and, based on the evaluations, moves stocks off of the GSM list. There are also provisions for quarterly reviews where companies at higher stages can be rolled back to their lower levels.
An organization can challenge its GSM listing position. They can challenge the SEBI (or bourses') decision in Securities Appellate Tribune, or the high court. SEBI will remove all trading restrictions if the company prevails. The tribune recently asked SEBI for the removal of all trading restrictions from J Kumar Infra or Prakash Industries.
GSM in the share market acts like a filter to separate good stocks from bad. Stocks of companies are subject to surveillance. There will be announcements in the newspaper and updates on NSE and BSE websites. These announcements can be sudden and immediate so you may not have enough time to exit the trade.