HOW ESM FRAMEWORK WORKS?

What is ESM framework?

The ESM framework is a regulatory tool introduced by the Securities and Exchange Board of India (SEBI) and the stock exchanges to monitor the trading activity of micro-small companies. In continuation to various surveillance measures already implemented, SEBI and Exchanges, pursuant to discussions in joint surveillance meetings, have decided that along with the aforesaid measures there shall be Enhanced Surveillance Measures (ESM) (on main board with market capitalization less than INR 1000 crores) based on objective parameters viz. Price variation, Standard Deviation etc.

Companies are selected for ESM based on objective parameters such as high price variation and high standard deviation in their stock prices. These parameters indicate that the stock price may be volatile and risky for investors. When a company is placed under ESM, it triggers certain regulatory actions. These actions include:

* Increased scrutiny by the exchanges: The exchanges will monitor the trading activity of the company more closely to identify any potential irregularities or manipulative practices.

* Increased reporting requirements for the company: The Company may be required to provide additional information to the exchanges about its financial performance and business operations.

* Restrictions on trading: The exchanges may impose restrictions on trading in the company’s stock, such as reducing the price band or increasing the margin requirements.

These measures are intended to make investors more aware of the risks associated with investing in micro-small companies and to encourage them to conduct thorough due diligence before making any investment decisions. The ESM framework is part of a broader effort by SEBI to promote fair and orderly trading in the Indian stock market.

Here are some additional points to consider:

* The ESM framework is a relatively new measure, having been introduced in June 2023. It is still too early to say what its long-term impact will be on the Indian stock market.

* Some critics of the ESM framework argue that it may discourage companies from listing on the stock exchanges, thereby limiting their access to capital.

* SEBI has stated that the ESM framework is a temporary measure and that companies can be removed from the framework if they meet certain criteria.

Stages under ESM Framework

There are two stages under the ESM framework – stage I and II – and trade under trade-for-trade with a 5% or 2% price band, whichever is applicable

What are the criteria for shortlisting scrips under ESM framework and what are the applicable surveillance actions on the shortlisted scrips?

The shortlisting of securities for placing in ESM framework is based on objective criteria as jointly decided by SEBI and Exchanges covering the following market based dynamic parameters:

• High Low Variation

• Close to Close Price Variation

• Market Capitalization

• Standard deviation

A) Shortlisting criteria (Stage 1): Either below condition 1 or 2 is met:

1. High-Low Price Variation (based on corporate action adjusted prices) in 3 months OR 6 months OR 12 months > 1Standard deviation (of High-Low variation of all Micro-Small Cap Companies as defined above).

                                                                         AND

         Minimum threshold of High-Low variation would be as under:

         3 months > 75%, 6 months 100% 12 months 150%

2) Close-to-Close Price Variation (based on corporate action adjusted prices) in 3 months OR 6 months OR 12 months > 1 Standard deviation (of Close-to-Close Price variation of all Micro- Small Cap Companies as defined above)

                                                                          AND

           Minimum threshold of Close-to-close variation would be as under:

          3 months > 50%

         6 months > 75%

         12 months > 100%.

Stage wise Surveillance action after inclusion in ESM

Review Period and Exit

Securities completing 90 calendar days in ESM Framework would be eligible for exit from the framework. However, in case a security is under stage 2 of the Framework, it shall be retained under stage 2 for a minimum period of 1 month. After completion of 1 month, in weekly stage review if such security’s close to close price variation is less than 8% in a month, it can move to stage 1 of the Framework.

The stage-wise review of stocks shall be on a weekly basis.

Securities completing 90 calendar days (subject to meeting of aforesaid condition in point 2) in the framework shall be eligible for stage-wise exit subject to such securities not meeting the entry criteria as laid down in point A.

The following securities shall be excluded from the process of shortlisting of securities under ESM:

• Public Sector Enterprises and Public Sector Banks

• Securities on which derivative products are available.

• Securities already under Insolvency and Bankruptcy Code (IBC)

• Securities already under Graded Surveillance Measure (GSM) Stage II and above

Notice:

This is in partial amendment to the Exchange notice no. 20230602-44 dated June 02,2023 and notice no. 20230718-46 dated July 18, 2023 in respect of Enhanced Surveillance Measures (ESM)

The notice informs that the existing Enhanced Surveillance Measures (ESM) framework was reviewed during the Joint Surveillance Meeting of Exchanges and SEBI held on August 9, 2024. Consequently, it has been decided to extend the ESM framework to include main board companies with a market capitalization of less than ₹1,000 crores. All other provisions outlined in previous notices shall remain unchanged. The revised framework will come into effect on August 13, 2024, and a separate list of shortlisted companies, in accordance with the amended framework, will be published. For any inquiries, members are advised to contact the designated BSE email.