New Circuit Filter By BSE

Three years ago, market regulator SEBI (Securities and Exchange Board of India) introduced the concept of periodic call auction system (PCAS) to curtail market manipulation in illiquid stocks. Earlier, certain small sections of the market participants at the cost of large section of uninformed retail investors used to get unfair financial gains. Therefore, SEBI in its effort to keep small investors away from such stocks, introduced PCAS. To continue on those lines, the BSE introduced weekly, monthly, quarterly and annual price bands (as per SEBI rules, only daily prices bands are mandatory) for securities ‘exclusively’ listed on the BSE platform, including SME and SME ITP platforms, to prevent excessive volatility in shares.

Along with that, the BSE has launched three new sub-groups for companies listed exclusively on its platform from November 2, 2015. The new sub-segments are XC, XD and XT, considering company-specific characteristics such as low to moderate market capitalisation, lower contribution to overall trading turnover, etc. The BSE believes that this has been found to be one of the ways through which people manipulate for tax evasion. Therefore, the BSE is mulling over creating a separate segment for such companies so that small investors are aware that these are small illiquid companies and that they should be careful.

On the other hand, many brokers believe there are many small companies whose volumes are less due to low floating stocks.But that does not necessarily mean there is manipulation and so such rules prove counter-reactive. The Exchange seems to have overdone its efforts by implementing such restrictions. Regulators should not disturb the normal trading pattern unless a major event is expected to impact the markets. Yet, there are many companies that are exclusively listed with the BSE and still do not come under the above sub-segments. The BSE has outlined six criteria and if any one of them gets fulfilled, that particular company is excluded from XC, XD and XT sub-segments.

Companies that do not fall within any of the above exclusions would be eligible for classification under XC, XD and XT sub-segments as under:

· As per the guidelines for the new segments, securities that have a six-monthly average market capitalisation of more than Rs 100 crore but less than Rs 1,000 crore and have more than 1,000 public shareholders are classified in the XC group.

· Balance securities would be classified in the XD sub-segment.

· Further, securities falling in restricted trading category like DT and T groups at present would be categorised under the XT sub-segment.

So far, the BSE has had a daily price band mechanism - maximum permissible limit within which the share price can move in a day. The listedsecurities are assigned a daily price band (circuit limits) of 20, 10, 5 or 2 per cent based on the pre-decided joint criteria. Now, the BSE has introduced a new long duration price band framework that has to follow price bands on a weekly, monthly, quarterly and yearly basis.
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Under the new framework, a security having a daily price band of 20 per cent can move upward or downward up to 60 per cent in a week whereas in a month it can move upward or downward up to 100 per cent. It can move 200 per cent or 400 per cent on a quarterly and yearlybasis respectively. For other price bands, refer the table below.

In addition to the above, for monthly, quarterly and yearly limits, a factor of 200 per cent of S&P BSE Mid-Cap Index movement shall be applied for taking into account the overall movement in the market to the monthly, quarterly and yearly price band limits.The BSE has brought under XC, XD and XT sub-segments around 2,000 companies and out of them around 935 stocks regularly trade on the exchange as per the daily ‘bhav’ copy as on December 4, 2015 and the remaining companies have been suspended or maybe do not trade frequently.

From the last one month, traders as well as investors are confused regarding price bands of these scrips.Finally, based on the feedback received from market participants, the BSE has decided to publish the applicable periodic price bands on a daily basis for all the applicable securities with effect from December 7, 2015. The same shall be available in the form of a separate file on the BSE website under the following section: Investors à Regulatory àPeriodic Price Bands

(Link: http://www.bseindia.com/investors/periodic_price_bands.aspx?expandable=5)

Conclusion

a) Companies which are classified under XC, XD and XT sub-segments are encouraged for listing on the NSE.

b) Traders have now avoided X group stocks and moved to B group in the last one month.

c) Our suggestion to small investors is to avoid X group stocks for trading purposes. If the company looks fundamentally strong, check its long-term vision and then invest for a longer time zone.

d) Before investing in these stocks, it is advisable to check the periodic price bands of the company.

Almost one third of the companies falling under new categories have market cap less than 10 crore.Actively traded companies under XC, XD and XT lying in different market cap brackets