Microcap stocks face pressure after bourses launch enhanced surveillance mechanism

Shares of micro-cap stocks came under pressure after BSE and NSE introduced an enhanced surveillance mechanism for companies with market capitalisations less than Rs 500 crore.

The surveillance mechanisms, which was launched on June 5 is designed to curb volatility in small-cap stocks.

Analysts said that given the current run-up in small and micro-cap companies, market regulator Securities and Exchange Board of India (Sebi) has taken this step to ensure that retail investors do not lose money because of price manipulation by market operators.

On Monday, around 599 firms were trading lower with around 60 stocks hitting the 5 percent lower circuit. Some 119 stocks remained unchanged and 1,130 stocks were trading higher. Among losers, Indowind Energy stock shed 23 percent, while Sah Polymers declined nearly 16 percent. Both the stocks were up over 25 percent between March 28 and June 2. Other stocks which traded lower included Minaxi Textiles, Country Condo’s Ltd, Golechha Global Finance, Gravity India, Samrat Forgings Ltd, Pasari Spinning Mills which were down around 10 percent each.

On the BSE, there are over 2,000 stocks with market capital below Rs 500 crore. Among these, around 1,600 stocks jumped 10-700 percent between March 28 and June 2. Around 400 stocks have given negative returns during this period.

“Retail investors more often than note get stuck in penny stocks during the market upcycle and such timely Sebi measures are much necessary to protect the interest of these investors,” said Mukesh Kochar , National Head – Wealth, AUM Capital Market.

Sebi and exchanges in a joint meeting have decided to introduce ESM framework for ‘micro-small’ companies (on the main board with market cap less than Rs 500 crore), the NSE and the BSE said in two separate circulars on Friday. However, public sector companies, PSU banks, or any stock which is part of a derivative has been kept as an exception.

The parameters for shortlisting securities under the ESM framework include high-low price variation and close-to-close price variation. These stocks will be settled through trade-to-trade mechanisms and will be capped at a circuit limit of 5 percent or 2 percent (for stage II).These stocks will be reviewed after three months and if fulfilled by parameters like volatility and price band criteria,  then they can come out from this framework.

“There is hyperactivity in many micro caps where the floating stock is low and is vulnerable to manipulation. The move by exchanges through ESM is welcome since it preempts manipulation,” said  VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.