Investing in the stock (share) market contains a level of risk. These risks are uncertain and can cause significant loss to investors or capital erosion. While most stock trading risks arise due to its natural market behavior, there are still many areas where malicious activities affect the investor’s interest. Indian investors have already witnessed major stock market crashes like the Manu Manek and Harshad Mehta scams of the 1980s. It is one of the biggest scams of the Indian stock market that questioned the credibility of exchanges and authorities.
Along with such malicious activities, technical glitches and errors can also affect the stock market to misbehave. But whatever the case is, at the end of the day, investors have to suffer, and regulatory bodies face a hard time maintaining their credibility in the market. Therefore, neither of these two wants to witness such market behaviors. The Indian stock market regulatory authority has applied various safety measures like ASM or Additional Surveillance Measures to control unwanted activities.
What is ASM or Additional Surveillance Measure?
ASM is one of the safeguard measures for investors. This mainly applies to stocks experiencing price fluctuations and having uncharacteristic stocks. The price fluctuation concept is called fair market value. The value gives the idea of a stock’s actual market price or the value at which the stock is supposed to be.
This price uses elements like the company’s performance along with other factors. Generally, the price of a company’s share in the market moves as per its market value. Also, price oscillation does not depend on the company’s fair value. This mainly occurs when traders manipulate the stock prices to make a profit by doing some speculative activities.
In the Indian stock market, most traders are retail investors, and only a limited percentage of traders have the capabilities to affect the stock market and manipulate it for their profit. Thus, often it has been seen that these traders do some activities that help them earn a profit but have a negative impact on other investors’ portfolios.
This is where ASM takes place, which works as a flagging mechanism to list shares that might have changes to move too erratically or are suspected to be affected by speculative activity. If a share gets listed in the ASM list, the price of a certain share affects certain limitations. It helps investors to think for a while before buying or selling such shares.
Types of ASM
There are mainly two types of ASM or Additional Surveillance Measures: Long Term ASM and Short Term ASM.
Long Term ASM
In the long-term ASM, the following criteria are satisfied.
The first condition says the high-low price variation for the last three months of stock should be more or equal 150% + Beta of Stock x Nifty 50 Variation. Additionally, the concentration of the top 25 clients must be more or equal to 30% of the combined trading volume in NSE and BSE in the last 30 days.
The second condition refers to the close-to-close price variation for the last 60 trading days must be greater or equal to 100% + Beta of the Stock x Nifty 50 Variation. In addition, the concentration of the top 25 clients must be greater than or equal to 30% of aggregated trading volume of NSE and BSE during the last 30 days.
The third condition occurs when close-to-close price variation for the last 365 days is higher or equal to the 100% + Beta of Stock x Nifty 50 Variation. With this, high-low variation for the last three months should be equal to or more than 150% + Beta of the Stock x Nifty 50 Variation.
This condition also has sub-clauses, including the company’s market cap should be at least 500 crores. The concentration of the top 25 clients should be higher or equal to 30% of the total volumes of BSE and NSE trade in the last 30 days.
We also have a fourth condition, which refers to the average daily trading volume in a month being more than 10,000 shares and 500% of the average trade volume in the last three months in the stock exchange. Furthermore, the top 25 clients should have equal or over 30% of trade volume in NSE and BSE in the last 30 days.
With this, the average delivery should be more than 50% in the last three months, and the company’s market cap should be at least Rs 500 crores. The close-to-close price variation for the last month should be greater than 50% + Beta of the Stock x Nifty 50 Variation.
In the long term, there can be four possible stages, as mentioned below.
Stage 1: Here, the applicable margin stands at 80% of T+3 days for all the clients.
Stage 2: Here, price reduction happens to a lower level, and applicable marketing stands at 100% from T+3 days for all the company’s clients.
Stage 3: The price band of stock is again reduced to the lower level where the applicable margin stands at 100% from the last T+3 days for all the clients.
Stage 4: Its final stage, where settlement takes place on a gross basis with a 100% margin and 5% price band.
Short Term ASM
In short-term ASM, there are mainly two stages mentioned below.
Stage one, it’s the place where stocks are added into a category and get a chance to provide some clarification on the same. The information gets added in short-term ASM and is visible to investors when they visit the website. Here the margin rate varies around 1.5 times the existing margin or 40%; the higher is considered.
Stage two is when stocks will have an ideal margin rate of 2.5 times the existing margin or 80%, whichever is higher. Here the maximum cap can amount to 100%.
Remember, not all the listed stocks are considered for ASM; certain exceptions exist. It means the stock of PSUs, Securities with Derivative Products, and Stocks under trade to trade segment.
ASM is one of the useful measures deployed by stock market authorities to control the price fluctuations of stocks so the investors get alert about the possible risk of facing loss or uncertain outcomes. You must know stocks listed in ASM lists are not facing disciplinary action. Hence, you can use this measure to choose ideal and less risky stocks to increase your chances of earning more from stock trading.