Home / Markets / Stock Markets /  What BSE’s new surveillance rule means for mid and small cap investors

NEW DELHI: Mid-cap and small-cap stocks have gotten severe beating in the past few trading sessions. The S&P BSE Smallcap index has corrected around 3% and S&P BSE Midcap has corrected 1.3% over the past five trading sessions while S&P BSE Sensex has touched a record high over the same period.

The sentiments have been hit by the new rules introduced by the Bombay Stock Exchange (BSE) regarding the new circuit limit for stocks. In order to curb excessive price movement on companies listed exclusively on the BSE platform, it has introduced new price bands for the movement of securities.

However, on Wednesday, the BSE clarified that the new surveillance measures will be applicable on securities in X, XT, Z, ZP, ZY and Y. The circular issued on Monday, had no clarity about the type of stocks on which the new circuit limit will be applicable. Mid-cap and small-cap stocks have recovered after BSE issued the clarification.

Let’s understand what these new circuit limits are and if these are going to impact small and midcap investors?

What are the new circuit limits?

As per the clarification issued on Wednesday, the new circuit limit also known as add-on-price bands will be applicable in case the price of the stock has moved 6 times in 6 months, 12 times in a year, 20 times in 2 years and 30 times in 3 years. The stock should have a price of 10 or more and the market capitalisation should be less than 1,000 crores.

Apart from this, these securities should be from groups X, XT, Z, ZP, ZY and Y. Stocks are classified into different groups on the basis of market capitalisation, impact cost (difference between the bid and ask rate), trading volume etc.

So, for example, if a stock is priced at 10 then, it should move 600% to 60 in the past 6 months or 1200% to 120 in the past one year, 200 (2000%) in 2 years and 300 (3000%) in 3 years, for the applicability of new circuit limits plus it should meet other criteria.

In case the security breaches these % marks, it will be placed in the add-on-price band framework for 30 days. The stock will move out of the price band if it does not qualify the provisions of the above framework thereafter. Review of the shortlisted securities under the framework that is inclusion/exclusion shall be carried out on a monthly basis. These additional price bands will be in addition to the daily price limits applicable on such securities.

What does it mean for small and mid-caps investors?

Experts believe that this is not going to have any bearing on investors of quality mid and small cap stocks. The purpose of the circular is to reduce speculation in penny stocks. “Stock groups X, XT, Z, ZP, ZY and Y mostly comprise of penny stocks," said Ajit Mishra, vice president, research, Religare Broking Ltd.

“Both midcap and smallcap have risen three times since March bottoms. It is a normal profit booking that we are seeing. The circular is focused on stocks which are not fundamentally strong but have participated in this rally," said Mishra.

“The exchange doesn’t want investors to speculate in such stocks. In the past (2007 rally) also we have seen such stocks witnessing massive correction and never reaching the high price again. It is mostly retail investors who burn their fingers with such stocks. The idea is to refrain from any speculation in such stocks," added Mishra.

As per experts, it is going to be business as usual for investors in quality mid-cap and small-cap stocks.

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