BSE’s amended price band rules stems midcap, small cap sell off

The BSE has rolled back some of the steps that it had proposed on Monday (August 9), which were aimed at curbing severe price moves in certain small and mid cap stocks. The stock exchange went easy after there was a steep sell-off in the broad market indices.

On Thursday, the BSE clarified that the proposal is for those securities listed only on its exchange and will be applicable for at least 30 days and for stocks that have a market cap of less than Rs 1,000 crore. As per the circular from the BSE that states the amended rules, the new proposal applies to only a few stocks which include shares trading over Rs 10 per piece.

The BSE had on August 9 brought in a framework called the ‘Add-on Price band Framework’, which is a surveillance system, according to which some securities would have weekly, monthly, and quarterly limits on price, apart from the price bands on a daily basis. The BSE’s earlier statement said that a security would be positioned in the framework for 90 days at least. This was later lowered to 30 days. The framework, according to the revised circular from the BSE, applies to securities that are exclusive to the exchange and belong to the X, Z, Y and XT, ZY, ZP groups.

Stocks that belong to the X group are exclusively listed on the BSE. XT group stocks are those that are settled on the trade to trade (T2T) basis. The stocks that belong to the Z group have failed in compliance with norms set by the exchange while stocks belonging to the Y group.

Aftermath of the circular

Following the circular announcing the introduction of the new framework by the BSE, trading in 521 small and midcap stocks saw a freeze because of only sell offs in the said stocks. Also, the midcap and small cap indices saw a fall of nearly 1 and 2 per cent each on Tuesday at a time when the benchmark indices rose to all-time peaks. The Sensex closed at over 54k on Tuesday. On Wednesday, the BSE midcap and small-cap indices crashed 490 and 862 points, respectively, intraday. The two indices recovered following the BSE clarification. On August 11, the midcap index of the BSE slid 0.22 per cent while the small cap index slipped 0.83 per cent.

The BSE has also clarified that stocks that have been listed on the basis of the new norms will have a half-yearly, annual, two and three-yearly price bands rather than the earlier stated weekly, monthly or quarterly limits beyond the price limits on a daily basis. This means that the stocks that have now been shortlisted can move six times in half a year and 12 times in a year and so on.

The stock exchange has also noted that the securities shortlisted under the new framework is only for purposes of surveillance and clarified that the move need not be perceived as an action against any entity or company.

Why the surveillance measures?

The move was brought in to curb speculation in mid-cap and small cap stocks, which have been on a roll. Small caps have outshined the Sensex by five times ever since the start of 2021. The BSE small cap index has been up by over 45 per cent, while the mid cap index has risen 28 per cent, while the BSE Sensex has grown 10 per cent. Experts note that when small caps outshine the Sensex by a huge gap, there tends to be a strong correction and investors take to profit-booking.

Exchanges have in the past introduced several measures aimed at surveillance so as to curb extreme price moves. These measures, with market regulator SEBI’s suggestions, include short-term additional surveillance measures (ST-ASM) and graded surveillance measures (GSM) among others. The BSE’s add-on price band framework is another step in that direction.

Conclusion

The BSE has rolled back some of the strict steps it announced on August 9 in a bid to curb severe price moves in small and mid cap stocks. The easing of measures from the BSE came after the markets saw a steep selloff in such stocks immediately after a circular was issued. The clarification helped many small and midcap stocks recover some of the losses on Wednesday. The amended rules apply only to some stocks that have a market cap of lower than Rs 1,000 crore and are not part of the liquid stock groups.