BSE clarifies on new surveillance rules after sell-off in smallcap, midcap stocks

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In the last few trading sessions, there has been a sharp sell-off in mid and smallcap shares and traders blamed it on the BSE for what looked like a seemingly harmless circular announcing surveillance measures to curb excessive price movements in smaller stocks.

Both the BSE smallcap index and midcap index tumbled more than 4 per cent in two trading sessions, before recovering part of the losses on Wednesday after the exchange issued an update to the circular stating the surveillance measures would be restricted to select group of stocks.

Stock exchanges in consultation with the market regulator SEBI regularly undertake surveillance measures to maintain market stability. On Monday, the BSE issued a similar circular to strengthen its surveillance, amid a massive rally in stock markets, especially midcap and smallcap over the past one year.

“In continuation with our endeavour to maintain market integrity and curb excessive price movement in securities listed exclusively on BSE trading platform, a need has been felt to further strengthen the extant surveillance measures. Accordingly, a new surveillance framework viz. Add-on Price Band Framework is being introduced by the exchange,” the bourse said.

Under the framework, the shortlisted securities would be subjected to additional periodic price limits. These add-on price bands would be in addition to the applicable daily price bands of such securities. The provisions are to come into effect from August 23, 2021.

What perhaps the exchange didn’t expect was the sharp sell-off that followed. So, on Wednesday, an update was issued where by BSE clarified that the said framework would be applicable in groups viz. X, XT, Z, ZP, ZY and Y, the security should have a price of Rs 10 and more and the marketcap of the security should be less than Rs 1,000 crore. 

Also, the shortlisted securities would have 6 monthly, yearly, 2 yearly and 3 yearly price band in place of weekly, monthly, quarterly price band it had proposed earlier.

Why did the investors panic, following the initial circular? Market experts say the circular was no reason to panic, but traders perhaps used this opportunity to dump some of the shares that had skyrocketed in a liquidity and speculation fuelled rally.

“When speculative fervour becomes the high octane fuel for ramping up share prices of micro, small and midcap stocks with limited float and questionable corporate governance, aided and abated by motivated whispers on electronic and social media, the denouement is bound to result in tears for small investors in the belief that markets can only go up,” said independent market analyst Ajay Bodke.

As the COVID pandemic hit last year, markets crashed as investors feared a big hit on the economy and businesses. But, even as we remain in the midst of COVID-19 and economic growth remains uncertain, equity markets have seen a huge rally driven by easy money policies by global central banks and huge foreign institutional as well as domestic retail fund flows.

The BSE Smallcap index, since hitting a low of 8,622.24 on March 24, 2020, jumped 217 per cent to an all-time high of 27,323.18 on August 4, 2021. Some small stocks rallied over 1,000 per cent in the past year as easy money flowed in. A correction was always around the corner, especially now that a sharp rise in inflation in countries, including India, has raised possibilities that global central banks will gradually begin normalising monetary policies in coming quarters.   

“When fundamentals get divorced from reality and liquidity is the sole determinant, any fears of reduction in flows can cause a panic. Some of the stocks had been ramped up three times or more. It was all building up and a correction was due,” said Bodke.

Other analysts also feel that the BSE surveillance framework with add-on price bands for specified stocks listed on the BSE was a timely initiative to curb excessive speculative activity.

“It is a fact that there is froth in the mid and smallcap space. Many stocks in this segment have low liquidity and, therefore, are capable of being manipulated by a group of traders. In the present exuberant state of the market, manipulation is easy. Therefore, this initiative from the BSE is appropriate from the perspective of market integrity,” said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services.

Vishal Wagh, research head at Bonanza Portfolio also agreed that midcaps and smallcaps were already overpriced and technically all indicators were showing overbought reading.

“The circular was only for BSE listed companies. So, it may not have a bigger impact on stocks listed on both the exchanges. But, sentimentally it’s a negative,” he said.

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