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Seasoned traders in the markets know that not every stock that rallies hard is a good investment pick, but new or inexperienced traders often fall into this trap. Stocks that witness sharp upswings without being backed by strong earnings, book value, or growth outlook often attract the attention of these small investors.
To spot such cases of price manipulation, India’s stock market regulator Securities and Exchange Board of India (SEBI) and the stock exchanges run the Graded Surveillance Measure (GSM). It is a mechanism to identify financially weak companies whose share prices are moving well beyond their fundamentals and restrict trading in them to protect investor interest.
This article covers in detail the meaning of GSM, how a stock gets shortlisted for GSM, how GSM differs from ASM and ESM, and what it means for you as an investor.
Key Takeaways
- GSM is essentially a surveillance tool aimed at identifying stocks with weak fundamentals and unusually high and volatile prices.
- The framework is jointly run by SEBI and India’s stock exchanges BSE and the National Stock Exchange of India (NSE).
- GSM currently runs across four stages (Stage I to Stage IV), down from the six stages it had when it was launched in 2017.
- Restrictions keep getting tighter with every stage, starting from higher margins and narrow price bands to trade-for-trade settlement, weekly trading windows, and a cash deposit of up to 100% of trade value.
- Stocks are shortlisted and reviewed for GSM every quarter on the basis of financial benchmarks like net worth, net fixed assets, market capitalisation, and price-to-earnings (PE) multiple.
- PSU (public sector undertaking) stocks are no longer automatically kept out of GSM. They can be shortlisted like any other listed company if they meet the criteria.
What is Graded Surveillance Measure (GSM)?
Graded Surveillance Measure (GSM) is a surveillance framework used by SEBI along with NSE and BSE to track stocks whose market prices do not match their underlying financial fundamentals.
The framework came into force on March 14, 2017, after NSE and BSE jointly issued a circular introducing the mechanism, with the first list of shortlisted securities published shortly thereafter.
The idea behind GSM is to identify companies with thin net worth, negligible fixed assets, and stretched valuations but unusually high or volatile stock prices. This mismatch helps spot cases of price rigging, pump-and-dump activity, or shell-company behaviour.
After flagging these names, GSM also places such stocks under graded restrictions and alerts investors to do their homework before trading in them.
Why did SEBI Introduce GSM?
GSM was introduced as one of the many pre-emptive tools used by SEBI and exchanges. Other similar measures include price band cuts, periodic call auctions, and shifting a stock to the trade-for-trade segment. In the trade-to-trade segment, transactions are settled through the actual delivery of shares, and intra-day trading is not allowed. Together, such measures serve two key purposes:
- Alert and advise investors to be extra cautious while dealing in flagged securities.
- Push market participants, including brokers and traders, to carry out proper due diligence before dealing in these names.
GSM does not accuse a company of wrongdoing. It simply tells the market that a stock’s price behaviour does not add up against its fundamentals, and that caution is warranted.
How Does a Stock get Shortlisted Under GSM?
A security qualifies for GSM only when it satisfies both Criteria I and Criteria II (as shown in the table below) based on its latest available financial disclosures. The table below summarises the current thresholds for mainboard and SME-listed companies:
| Parameter | Mainboard Companies | SME Companies |
| Net worth | ₹10 crore or less | ₹5 crore or less |
| Net fixed assets | ₹25 crore or less | ₹10 crore or less |
| P/E multiple (Criteria I) | More than 2x the P/E of Nifty 500, or negative | More than the P/E of Nifty 500, or zero/negative |
| Full market capitalisation (Criteria II) | Under ₹25 crore | Under ₹10 crore |
| P/B multiple (if P/E is negative) | More than 2x the P/B of Nifty 500, or negative | More than the P/B of Nifty 500, or negative |
The exchanges review this list every quarter, based on financial results companies file under SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations.
Which Securities are Kept out of GSM?
A stock is not considered for GSM if any of the following applies:
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Price discovery for the stock has not yet taken place.
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The security is already under trading suspension.
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Derivative contracts are available on the stock.
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The stock is part of an NSE or BSE index.
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It was listed through an initial public offering (IPO) in the preceding one year.
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The company has paid a dividend in each of the last three years.
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Institutional holding exceeds 10%, provided the promoter has not sold shares in the last five years and the current price sits within the stock’s three-year trading range.
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The stock was listed via a merger or demerger in the last year, subject to specific conditions on how the parent entity’s GSM status carries over.
Note: PSU stocks were earlier assumed to sit outside the exclusion list on account of their government ownership, but this was never a formal carve-out. Following a joint SEBI–exchange review, NSE and BSE circulars dated September 20, 2024 confirmed that PSU companies are now explicitly brought within the GSM (and ESM) framework on the same footing as other listed companies, effective September 23, 2024.
The Different Stages of GSM
SEBI originally rolled out GSM with six stages in 2017. Following a joint review by SEBI and the exchanges in November 2019, the framework was streamlined to four stages, which remains the structure in force today. A shortlisted security first sits in Stage 0, before moving sequentially through Stage I to Stage IV as it continues to meet stage-specific criteria.
| Stage | Surveillance Action |
| Stage 0 | Initial shortlisting; the stock carries a surveillance alert but no trading action yet. |
| Stage I | 100% margin applies, with a price band of 5% or lower. |
| Stage II | Moves to trade-for-trade settlement with a 5% (or lower) price band; buyers must pay an Additional Surveillance Deposit (ASD) of 50% of trade value. |
| Stage III | Trade-for-trade settlement continues; trading is allowed only once a week (Monday or the first trading day); ASD rises to 100% of trade value. |
| Stage IV | Same restrictions as Stage III, but with no upward price movement permitted at all. |
Every stage builds on the one before it. So, a Stage III stock, for instance, carries the price band, weekly trading window, and deposit requirement together, not in isolation.
While the GSM framework itself was streamlined to Stage I–IV in 2019, a batch of listed companies identified as shell entities in 2017 were placed directly in the older "Stage VI".
- They continue to carry that legacy tag rather than moving into the new four-stage structure.
- Under Stage VI, trading is restricted to the first Monday of the month, on a trade-for-trade basis, with no upward price movement allowed and a 200% ASD payable by the buyer.
- So, it is normal to still see "Stage VI" referenced in exchange outputs for these older flagged names even though new shortlisting only uses Stage I–IV.
How the Additional Surveillance Deposit (ASD) Works?
ASD kicks in once a stock reaches Stage II or higher. Here’s what you should know about ASD:
- The buyer of the security pays the ASD, collected through the buying trading member.
- It is debited on a T+1 basis and paid entirely in cash, over and above the regular margins. This must be funded in actual cash. This means that pledged shares or other collateral cannot be used to meet the ASD requirement.
- The deposit is interest-free and cannot be used to fund further trading exposure.
- It applies uniformly across retail and institutional clients.
- Amounts collected in a given month are held for roughly a month and released on the second Monday of the following-but-one month, unless the stock exits GSM earlier, in which case release timing is intimated separately.
Separately, stocks under GSM Stage II or higher (T2T) usually can’t be used as collateral for margins with brokers. Since these stocks have trading and settlement restrictions, they are generally removed from the collateral list.
How Stocks Move Between Stages and Exit GSM?
Two separate review cycles determine a stock’s journey through GSM. Inclusion and exclusion from the framework itself are reviewed quarterly, using each company’s latest quarterly financial results (or half-yearly for SME stocks). A stock that stops meeting Criteria I and II is dropped from the list.
Movement between stages is reviewed monthly. If a stock in Stage III or above no longer meets the criteria for that stage, it can be relaxed to Stage II.
The exact quantitative triggers for stage movement are not published. Investors typically learn of a change only through exchange circulars that are usually issued after market hours with about a day’s notice before the action takes effect.
Trading terminals also display an on-screen alert whenever an order is placed in a GSM-flagged stock.
GSM vs ASM vs ESM: What is the Difference?
Investors often confuse GSM with two related frameworks: the Additional Surveillance Measure (ASM) and the Enhanced Surveillance Measure (ESM). All three restrict trading, but they are triggered by different things.
| Framework | What It Targets | Typical Trigger |
| GSM | Fundamentally weak companies | Price rise not supported by net worth, fixed assets or earnings |
| ASM | Unusual trading behaviour | Sudden price or volume spikes, high client concentration, low delivery percentage |
| ESM | Micro and small-cap companies | Similar fundamental mismatch as GSM, applied to a narrower market-cap band |
In practice, a single stock can sit under more than one framework at the same time. The applicable restrictions then apply in conjunction with one another.
What GSM Means for You as an Investor?
Placement under GSM does not automatically mean a company has done something wrong, but it is a strong signal to slow down and do some research.
For existing holders of such shares, the practical impact is lower liquidity in the stock, wider price bands, and an upfront cash deposit just to buy the stock from Stage II. Exiting a Stage III or Stage IV position can also take longer, since trading windows open only once a week.
Before buying a GSM-listed stock, it is advisable to check the company’s latest financials, promoter shareholding trends and the specific stage it is placed in, since each stage carries a different cost and liquidity trade-off.
How to Check if a Stock is Under GSM?
A few ways to verify a stock’s GSM status are as follows:
• Visit the surveillance section on the NSE or BSE website, which publishes the current GSM list stage-wise.
• Watch for the on-screen alert your broker’s trading terminal shows when you place an order in a flagged stock.
• Track exchange circulars, which are issued around every quarterly review cycle.
Can a Company Challenge its GSM Status?
A company placed under GSM can represent its case to the exchange or SEBI. If unsatisfied, it can also appeal before the Securities Appellate Tribunal (SAT) or the courts. If the appeal succeeds, the trading restrictions imposed under GSM are lifted.
Conclusion
GSM works like a filter to separate financially sound companies from those whose stock prices have run ahead of their fundamentals. It may not catch every risky stock, but chances of a genuine company being flagged are rare. So, investors should use this tool to pause, reassess their decision and verify information before committing capital to such stocks.
