Explainer: What is the new BSE rule that is hurting midcaps & smallcaps?

NEW DELHI: What rise in inflation, strong dollar and multiple waves of pandemic couldn’t do, an innocent looking circular from India’s oldest exchange has done it. A BSE circular issued on Monday has virtually halted the rampaging rally in mid- and- small-cap stocks.

BSE in its “endeavor to maintain market integrity and curb excessive price movement in securities listed exclusively on BSE Trading Platform” has strengthened the extant surveillance measures.

The step has hurt smallcaps the most. During the current week BSE Midcap index is down nearly 4 per cent while BSE Smallcap index has plunged over 5 per cent.

Reaction to the circular has been mixed. While some have welcomed a “correction” in “overheated” broader markets due to the circular while others believe it was unnecessary.

We talked to stakeholders and market participants involved in the decision making to understand the nitty-gritties of the issue in question. Read on...

What are surveillance measures?
Common on all exchanges, surveillance measures are used to put certain stocks that show unusual activities under watch. Some of the common ones are Graded Surveillance Measures (GSM), Additional Surveillance Measure (LT-ASM), Short-Term Additional Surveillance Measure (ST-ASM), etc. Circuit filters are also a kind of surveillance measure.

These measures are not related to the fundamentals of the business aspect of stocks but largely based on volume or price movements. For example, NSE has currently 400 stocks under long-term ASM while 28 are under short-term ASM.

What is the latest BSE circular about?
Both Mumbai-based exchanges already have daily circuit filters for most stocks. They range from 2-20 per cent. For example, if a stock has a 20 per cent circuit and last closed at Rs 100, then it can move only in the range of Rs 80-120 in the next trading day.

On similar lines, BSE has put another circuit which will be applicable on a larger period of time. Continuing with the same example, in one week, the trading range will be Rs 60-160, for a month Rs 200-50 and for a quarter Rs 300-30. Any price quoting beyond the range will result in no trade.


The ranges vary for stocks whose daily circuit limit is different. The reference price (in our example Rs 100) will be decided on the time frame. For example, to calculate the weekly band, the close price of the last trading day of the preceding week will be considered, for the monthly band price on the last trading day of preceding calendar month and so on.

Is the circular applicable to all stocks on BSE?
No. It is applicable to only those stocks that are listed specifically on BSE and nowhere else. BSE has about 4,748 stocks on its platform of which 3,899 stocks are available for trading. In comparison, NSE has around 1,700 stocks that are available for trading.

How will stocks be selected for the add-on circuits?
BSE clarified that the rule is valid for only those stocks that belong to X, XT, Z, ZP, ZY, Y groups and have a market cap of less than Rs 1,000 crore. Moreover, their share price should also be Rs 10 or more.

For the stock to be put under watch, they need to have moved either six times in the last six months or 12 times in as many months or 20 times in two years or 30 times in three years.

How will a stock move out of the list?
A security placed under watch shall remain in the framework for a minimum period of 30 calendar days and shall be eligible to move out if it does not qualify the provisions of the above framework thereafter. BSE said review of the shortlisted securities under the framework i.e. inclusion/exclusion shall be carried out on a monthly basis.

From when is the rule applicable?
The rule comes into action from August 23.

Why did BSE bring about the circular?
Market participants say since BSE has a large number of small companies, many are sparingly traded with negligible volumes. This gives opportunity to some traders to manipulate prices. In the past few months we have seen many stocks surging manifold in a short span of time, attracting retail investors, who end up losing money to manipulators as there is hardly any fundamental reason for stocks to rise.

Which stocks will be affected by the BSE circular?
These are the stocks that will get affected: Anjani Foods, Ashiana Agro Industries, Assam Entrade, Available Finance, AVI Polymers, B&A Packaging India, Cosmo Ferrites, Flomic Global Logistics, Garware Synthetics, Gita Renewable Energy, Gopala Polyplast, Halder Venture, Hazoor Multi Projects, IEL, Jaykay Enterprises, LWS Knitwear, Master Trust, One Global Service Provider, Pacheli Industrial Finance, Pan Electronics India, Pooja Entertainment and Films, S & T Corporation, Sangam Renewables, Saraswati Commercial India, Sarthak Industries, SC Agrotech, Shree Worstex, Shri Bajrang Alliance, Siel Financial Services, Svarnim Trade Udyog and Texel Industries.

Is NSE also coming with something similar?
A spokesperson for NSE said there are no such plans since NSE has a relatively much smaller universe. Hence, they do not have many small companies. Price manipulation is more rampant in small and microcap companies. The person said NSE already has some measures to protect investors.