What Is Graded Surveillance Measure (GSM)? Stages & Rules

you come to know that it has been placed under the Graded Surveillance Measure. You might wonder what it actually means and how it can impact your trade.

In today’s blog post, we will give you an overview of the Graded Surveillance Measure along with its different stages.

What is Graded Surveillance Measure?

It is a framework that is used by the stock exchange and works under SEBI regulations. It monitors certain listed securities that generally show unusual characteristics related to their price movement, valuation, etc. The key objective of the graded surveillance measure is to protect the interests of investors to maintain market integrity. These stocks require close monitoring.

Stocks under GSM are generally placed under different surveillance stages; higher trading restrictions are placed at higher stages. These restrictions include higher margin requirements, trade-to-trade settlement, and limits on the frequency of trading in stocks.

Why is GSM Required?

The key reasons why GSM is important are as follows:

• Protecting Investors’ Interest: GSM provides additional attention to stocks that may carry higher risks because of their price, valuation, etc.
• Stop Speculation: There are various stocks that may experience higher buying activity without improvement in their fundamentals. GSM regulates speculation by making trading more difficult.
• Due Diligence: If a stock comes under GSM, it makes investors look at the stock with more attention beyond their stock price.
• Restriction in Graded Manner: GSM does not necessarily impose the same restriction on every stock. They are applicable in a graded manner and increase at the higher stages. 

Why are Stocks placed under GSM?

The key reasons why stocks are placed under GSM are as follows:

• Valuations: Valuations are the key reason why stocks are kept under GSM. This generally happens when a stock becomes significantly high compared with its financial performance.
• Financial Position: The company’s financial position plays a key role in putting it in GSM. Weak financial performance, high debt, etc. may put a company under GSM surveillance.
• Low Capitalisation: If a company has very low market capitalisation and if it combines with other factors that may qualify for GSM, then such companies may be put under GSM.
• Price Difference: There are various small companies that have low trading volume, which will make the price difference more significant. A sharp price movement can cause high volatility; therefore, such companies are put under GSM.

Read Also: Stock Market Bubble: Meaning, Causes, Stages & Risks

Stages of Graded Surveillance Measure (GSM)

Currently, the GSM framework is implemented in six steps, which are as follows:

GSM Stage	Key Measures
Stage I	100% applicable margin and 5% or lower price band, as applicable
Stage II	Trade-to-Trade settlement, 5% or lower price band and 50% Additional Surveillance Deposit (ASD)
Stage III	Trade-to-Trade settlement, trading once a week, 100% ASD and 5% or lower price band
Stage IV	Trade-to-Trade settlement, trading once a week, 200% ASD and no upward price movement
Stage V	Trade-to-Trade settlement, trading once a month, 200% ASD.
Stage VI	Trade-to-Trade settlement, trading once a month, 200% ASD, and no upward price movement.

• Stage I: This is the first step of the GSM level in which a 100% margin is required to ensure safety. Also, stocks in GSM stage one trade at a 5% or lower price band, as applicable.
• Stage II: In this second stage of GSM surveillance, restrictions increase. The stocks are moved into the trade-to-trade segment, indicating that trades are settled through delivery only and no intraday trades in those stocks are allowed.
• Stage III: In the third stage of GSM, trading is more restricted. The securities in this stage are generally traded once a week. Buyers are required to deposit an additional surveillance deposit that is equal to 100% of the trade value with a 5% or lower price band.
• Stage IV: This stage is considered the most restricted stage of GSM. In this stage, a 200% ASD is required, and stocks are traded only once a week.
• Stage V: Stage five is also a trade-to-trade stage in which a 5% price band is allowed, and trades can be placed once a month. There is also a 200% ASD applicable in this stage.
• Stage VI: It is a trade-to-trade stage with a price band of 5%, and stocks in this stage are allowed to trade only once a month. There is also a 200% ASD applicable, and no upward price movement is allowed.

Restrictions Under GSM

GSM-listed stocks can come with additional trading conditions designed to control excessive speculation and protect investors. Depending on the surveillance stage, investors may face:

• Mandatory Delivery: Shares may need to be held in the demat account, with intraday trading restricted.
• Tighter Price Limits: The stock may be subject to a reduced daily price band.
• Additional Deposits: Investors may have to maintain an extra deposit when buying certain GSM stocks.
• Limited Trading Opportunities: Trading may be allowed only on specific days at higher surveillance stages.
• Stricter Exit Conditions: Higher GSM stages can make buying or selling the stock more difficult.

What is Trade-to-Trade Settlement?

Trade-to-trade is a type of stock market settlement in which each buy and sell transaction results in actual delivery of shares. Investors are not allowed to trade in these stocks on an intraday or same-day buy-and-sell basis. It means that when you sell shares, you need to have the required shares available for delivery. This method is generally used as a surveillance measure to reduce speculative activities in shares. 

How Does GSM Affect Investors?

A GSM affects investors in the following manner:

• No Option for Intraday: There are various stocks placed under GSM; they may move to the trade-to-trade segment. This means investors generally cannot buy and sell stocks within the same day.
• Higher Margin Requirement: Stocks which are under GSM require higher margin; such stocks require 100% to 200% margin, which requires higher initial capital.
• Frequency of Trading: There are a few stages of GSM under which stocks are allowed to trade only once a week or month.
• Liquidity: There are various trading restrictions applicable to stocks under GSM; this may reduce the number of market participants who are willing to trade in these stocks. 

How to Check Whether the Stock is Under Graded Surveillance Measure (GSM)?

Investors can easily check the list of stocks under the graded surveillance measure as follows:

• Website of Stock Exchange: One can visit the website of stock exchanges such as NSE and BSE.
  Navigate to the GSM Section: Once you visit the website of the exchange, you can navigate to the market surveillance section and click on GSM.
• Searching Stock: After clicking on the GSM button, a list will populate that includes the shares under GSM. You can easily search for the stock that you want to check that is under GSM or not.
• GSM Stage: If the stock appears in the list you stock also has the stage of GSM. One is required to check the GSM stage carefully because the restrictions may change significantly. 

Read Also: What Are Restricted Stock Units (RSUs)?

Factors to Consider Before Investing in GSM Stocks

The key factors that one is required to consider before investing in GSM stocks are as follows:

• Reason why a stock is in GSM: The first step is to identify the key reason why the stock is under GSM. However, it is advisable that one must not invest in a stock only because it has given high returns in past.
• Checking the Stage of GSM: The trading restriction on the stocks under GSM depends on the stage to which it belongs. It helps one in tracking the stock’s price movement.
• Company Fundamentals: Before investing in any GSM stock, one must look closely at the stock’s fundamentals, including its financial health, revenue growth, etc.
• Exit Risk: If you are trading in stocks that are under GSM, they carry higher risk. Therefore, one must invest in these stocks and maintain proper stop-loss, as it helps in protecting 

Conclusion

On a concluding note, to protect the interest of investors, the exchange came up with a mechanism known as GSM or Graded Surveillance Measure. This mechanism keeps a close watch on the securities and puts restrictions on trading of such securities. These restrictions include trade-to-trade settlement, higher margins, etc. Investors who wish to take higher risk can consider investing in stocks under GSM but only after considering the company’s fundamental and financial performance. Also, it is advisable to consult your investment advisor before making any investment in GSM stocks. 

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