ASM Stocks: Should You Press The Panic Button?

ASM Stocks: Should You Press The Panic Button?

Additional Surveillance Mechanism (ASM) is just an additional step launched by SEBI in order to minimise damage to investors who have invested in those securities that show signs of abnormal volatility and hence may be vulnerable to manipulation. Geyatee Deshpande explains in detail the logic behind the ASM list of stocks while pointing out that there is no need to press the panic button just because their favourite stocks feature on the ASM list

Ideally speaking, a rational investor should aim to park risk capital in quality stocks that are growth-oriented or can generate cash flows in the form of dividends. There are various parameters and definitions of what a ‘quality stock’ is. Most intelligent and disciplined investors do manage to identify quality stocks and invest in them for the long term to generate decent returns. However, a majority of investors struggle to identify quality stocks in the first place and many of them do end up holding poor quality stocks in the portfolio. Some retail investors in pursuit of high returns end up buying volatile stocks that may not be high in quality. 

Often enough, investors may have noticed that several highvolatility stocks feature on the Additional Surveillance Mechanism (ASM) list. Once the stock features on the ASM list, it is seen that an investor gets a little nervous and may take a decision that could prove to be unprofitable. Talking about such an experience, Amol Lad, a retail investor, says, “I bought CG Power at Rs 12 per share and to my surprise the stock doubled within one month to trade at Rs 24 per share. One day I just wanted to check the stock price on the bourses and I realised the stock was featuring on the ASM list.”

“Honestly, I had no clue as to what is ASM and what happens to stock prices when it is on the ASM list but I decided to sell all of my CG Power holdings in the portfolio just because it featured on that list. Within four trading sessions the stock price jumped by another 15+ per cent which made me realise that I had made a mistake,” he adds. What happened with Lad can happen with any investor. So, it is important that investors understand what exactly is ASM and why was it implemented in the first place. More importantly, it is crucial to study what happens to ASM stocks once they feature on the list.

Generally, it is seen that investors who lack enough awareness about stock markets fear the word ‘surveillance’ as the word in itself makes investors assume that there must be something ethically wrong in the company’s structure or business. Triggered by this thinking, unnecessary panic selling was seen wreaking havoc and creating fear in the markets as a majority of stocks came under the scanner when the ASM framework was first introduced.

One of the most important roles of Securities Exchange Board of India (SEBI) apart from its ‘regulatory functions’ and ‘development functions’ is ‘protection function’. Protecting investors’ interest is one of the topmost priorities of SEBI. The basic purpose of creating the ASM framework is to alert and advise investors to be extra cautious while dealing in securities placed on the ASM list as well as to advise market participants to carry out the required due diligence while dealing in such securities.

According to Vinod Nair, Head of Research at Geojit Financial Services, “Additional Surveillance Measure is a surveillance method in which the exchanges impose trading curbs on excessively volatile stocks by checking high-low variation, client concentration, volume variation, delivery percentage, PE ratio, etc. Such curbs discourage speculators and intraday traders from taking heavy positions in stocks that often leads to reduction in liquidity and which may lead to some short-term underperformance.” 

Inclusion on the ASM List

So, when is your stock likely to be included on the ASM list? There are two stages in the ASM framework – long-term and short-term. NSE and BSE have given a detailed explanation on the criteria for short-listing of stocks under long-term surveillance or short-term surveillance. Some of the criteria for short-listing of securities under long-term surveillance include:

☛ If the high-low price variation (based on corporate action adjusted prices) is more than 150 per cent + beta of stock (S & P BSE Sensex variation or Nifty 50 variation) within a period three months and if the concentration of top 25 clients accounts for more than 30 per cent of the total combined trading volume of BSE and NSE in the stock in the last 30 days and if the market capitalisation is more than Rs 100 crore.

☛ If close-to-close price variation (based on corporate action-adjusted prices) in the last 60 trading days has been more than 100 per cent + beta of stock (S & P BSE Sensex variation or Nifty 50 variation) within a period three months and if the concentration of top 25 clients accounts for more than 30 per cent of the total combined trading volume of BSE and NSE in the stock in the last 30 days and if the market capitalisation is more than Rs 100 crore.

☛ Average daily volume in a month is more than 10,000 shares, greater than 500 per cent of average volume in the preceding three months at BSE and NSE and if the concentration of top 25 clients accounts for more than 30 per cent of the total combined trading volume of BSE and NSE in the stock in the last 30 days and if the average delivery percentage is less than 50 per cent in the last three months and close–to–close price variation (based on corporate action-adjusted prices) in the last one month is greater than 50 per cent + beta of stock (S & P BSE Sensex variation or Nifty 50 variation) while market capitalisation is more than Rs 500 crore.

☛ If close-to-close price variation (based on corporateaction- adjusted prices) in one month is more than 25 per cent + beta of stock (S & P BSE Sensex variation or Nifty 50 variation) and the PE ratio is negative or is more than two times of S & P BSE Sensex PE or PE of Nifty 50 and market capitalisation is less than Rs 500 crore as on the review date.

Some of the criteria for short-listing of securities under the short-term surveillance include:

☛For stocks with a market capitalisation more than Rs 100 crore and less than or equal to Rs 500 crore, if high-low variation on a one-month basis is greater than 75 per cent and average unique PANs trading in the scrip in the last one month is less than 100.

☛For stocks with a market capitalisation greater than Rs 500 crore if high-low variation on a one-month basis is greater than 75 per cent and average unique PANs trading in the scrip in the last one month is less than 200.

Back in May 2020, Graphite India, considered to be a multibagger stock, gave exceptionally high returns in a period of just one year. Later, the stock was put on the ASM list. It is quite common to see multi-bagger stocks on the ASM list as these stocks witness high price volume spike and have to be therefore put under watch. Recent examples include Adani Green Energy, JB Chemicals and Pharmaceuticals, Affle India, Ramco Systems, etc. Generally, after stocks enter the ASM list, an applicable margin of 80 per cent or 100 per cent is implied with an additional reduction in the price band level. Additionally, a clarification is also sought from the company about any corporate announcement, if any, that has not been made public.

Stocks that complete the review process for 60 complete calendar days under the long-term ASM framework become eligible to exit from the framework stage-wise, coming down from Stage 4 to Stage 1 and then exiting. In case of stocks under the short-term framework, they are eligible to exit after a minimum period of five days and a maximum period of 15 days if they further do not attract any criteria. Intraday trading becomes difficult for investors as they have to deposit 80 per cent or 100 per cent margin and reduction in price bands means traders have limited chances of profits and losses.

It is quite common to see stocks posting huge gains when they get excluded from the list. On the other hand, due to the negative bias, stocks entering the ASM framework are likely to be reported about in the news which impacts existing and short-term investors’ profits. Once a stock enters the ASM list, investors must be alert and study the fundamentals of the stock. If it is a company with poor performance, they should consider exiting immediately. It is seen that stocks decline when they enter the ASM list. The table below highlights some examples:

Since the price of a stock declines on the news of it entering ASM framework, many analysts believe that those investors well-versed in trading may place a bet as it could be the right time to pick up a stock that has been placed on the ASM list. But this applies to only those companies which are financially strong and follow good corporate governance ethics. Thus, whether to accumulate or not is primarily based on an investor’s belief in the company. Once a stock enters the ASM framework, there are investors who may tend to panic and start selling. Since the ASM frameworks are not related to the fundamentals of a company, as long as one has the conviction about the quality of business, one can continue to hold such scrips as part of their portfolio.

ASM measures are quite technical-based and a company can come under the scanner even if nothing has been changed in its business. When fundamentals are intact, investors should not shy away from holding such stocks. Of course stocks’ prices come under pressure due to ASM, but investors need to have patience and hold them through this phase as long as one is sure that the companies are fundamentally strong. Says Vinod Nair of Geojit Financial Services, “ASM is a measure to scrutinize trades and control malpractice in certain counters, if any. Investors need not be overly worried as these measures are not a reflection of a company’s quality or fundamentals, but there’s a possibility of getting stuck with a stock without getting an opportunity to exit because of the narrow price band criteria.”

“Scrutiny is high for stocks with high speculative nature usually seen in small-caps, penny stocks and weak fundamentals. So, it would be prudent to check for fundamentals like good business models, having strong growth potential and low leverage before investing in any stock. Long–term investors need not be concerned about short-term volatilities in the stock,” he adds. NSE itself states that short-listing of securities under the ASM framework is done purely for the purpose of market surveillance, and it should not be considered as an adverse action against a company. Hence, an investor should avoid taking rash steps as exiting a quality stock just because it was shortlisted in the ASM framework could deny the investor of future multi-bagger profits.

Jaikishan Parmar,
Sr. Equity Research Analyst, Angel Broking Ltd

Do stocks that are featured on the ASM list underperform?

An investor should not paint all stocks with the same brush in the ASM category. A selection of stocks is not based on the fundamentals. It is based more on the price movement. Stocks get a tag of ASM based on certain parameters such as variation in high-low price levels, client concentration, number of price band hits, close-to-close price variation and market capitalisation. These measures are technical-based and a company can come under it even if nothing has been changed in the fundamentals of its business.

There is a possibility that a stock could remain under pressure initially, considering the ASM category stock price movement is restricted to 5 per cent and a trader dealing in such stocks has to deposit 100 per cent margin. Therefore, the stock could remain under pressure for a very limited period; however, a fundamentally sound company’s stock price would follow its fair value over the mid to long-term period. The wise thing for an investor to do is to stay away from fundamentally weak stocks whether or not they are on the ASM list.

What would you advise investors to do when any stock enters the ASM list?

An investor should not panic if a fundamentally sound company has been added to the ASM list as the selection is purely skewed towards price movement and not backed by fundamentals. An addition to the ASM list does not change the fundamentals of the company. Yes, when the stock is added to the ASM list, we advise investors to re-check all their fundamental arguments at the time they bought the stock. If all arguments are still valid then they should hold the stock.

Conclusion

The adage ‘not all stocks are right for everyone’ or ‘different stocks are for different folks’ apply perfectly in a situation when the stock under consideration is featuring on the ASM list. While by merely featuring on the list does not make a stock ‘bad ‘or ‘good’, if one focuses on the reasons why the stocks are on the ASM list, conservative investors need to take this additional information a little more seriously than an aggressive investor would. It is correct to some extent to say that the fundamentals of the stock should be studied rather than giving importance to the fact that the stocks may be featuring on the ASM list. From a portfolio perspective, the volatility of the stocks does matter.

Ultimately, portfolio management is all about maximising risk-adjusted returns and volatility is as important an element of risk-adjusted returns as returns itself. Higher risks will bring down the risk-adjusted returns drastically. In other words, stocks featuring on the ASM list may be extremely sound fundamentally but they are considered risky because of their volatile nature and should not feature in the portfolio of conservative investors. Stocks that regularly feature on the ASM list, both long-term and short-term, can be perused for fundamentals only by those investors who are willing to embrace higher volatility.

Even moderate risk-takers should not dither from stocks that feature on the ASM list since the portfolio riskiness is assumed to be high for both aggressive high-risk investor and moderaterisk investor. Generating 10 per cent returns by investing in stocks like TCS in one month is not the same as earning 10 per cent returns by investing in stocks like CG Power or Mangalum Drugs. This is despite the fact that investors might argue that the returns are same and so how does it matter which stock or category is generating it. Experts would argue that it’s not same as the volatility is different for both the stocks and hence one must prefer investing in that stock which gives similar returns while being less volatile. 

Apart from being more volatile and showing tendencies to fluctuate wildly, there is nothing wrong with the stocks that may feature on the ASM list. One may find both poor-quality stocks as well as high-quality stocks on the ASM list just as one finds both kinds of stocks in the A group list of stocks that are listed on the BSE. Aggressive investors can consider investing in stocks that have featured on the ASM list or are currently featuring on the ASM list. A conservative investor is conservative for a reason and that reason being that he prefers low volatility and is willing to sacrifice higher returns to keep the overall volatility low in the portfolio. Hence conservative investors can give stocks that feature on the ASM list a miss.

That said, when a fundamentally good stock is featured on the ASM list it can be sentimentally negative for the short term. However, it in no way deteriorates the long-term fundamentals and hence long-term investors, be it conservative investors or otherwise, should not be afraid when the stock features on the ASM list. What ASM does is that it curbs the bullishness of the underlying if the underlying is showing wild swings in one direction with abnormal volumes and concentrated participants. That’s all! To reiterate, investors need not panic if their stock is featured on the ASM list.

 

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