Under the revised framework, effective Monday, stocks will be shortlisted for Stage 1 not just on the basis of high-low price variation, but also if they exhibit a positive price trend over the past three months
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HEMANSHI KAMANI

SEBI’s revamped enhanced surveillance mechanism (ESM) framework for small-cap companies is expected to cool off overheating in the space, as stricter valuation and volatility filters deter speculative trading. Market participants anticipate reduced liquidity and a pause in momentum-driven rallies in the near term, but structurally improve transparency and protect retail investors.

Under the revised framework, effective Monday, stocks will be shortlisted for Stage 1 not just on the basis of high-low price variation, but also if they exhibit a positive price trend over the past three months. Stocks will move to Stage 2 surveillance only if they also have a price-to-earnings (PE) ratio either in the negative or more than twice that of the Nifty 500 index, to ensure fundamentally strong stocks are not unnecessarily penalised.

This means that the company showing high variation, facing losses, or stretched valuations will be considered for Stage II, where trading restrictions are stricter. It ensures that the fundamentally strong and reasonably valued micro and small-cap companies do not face a regulatory hurdle, industry experts said.

“The move to revise the shortlisting criteria along with the stage-wise actions, reflects a balanced approach towards curbing speculative activity without unnecessarily disrupting investor confidence in small-cap scripts,” Ajay Garg, CEO at SMC Global Securities said. “The new shortlisting criteria also adds a requirement for positive price movement over the last three months, ensuring the selection of smaller companies showing recent upward momentum,” Garg said.

Tighter criteria

Stocks placed in Stage 1 will continue to face tightened trading restrictions, including 100 per cent margin requirements and trade-for-trade settlement with a 5 per cent price band starting from T+2 days. Stage 2, the more stringent layer, will now target only those companies with volatile price action and suspect valuations, effectively shielding stronger companies from regulatory overhang. If a stock already operates under a 2 per cent price band, that restriction will remain unchanged.

“Stocks with market-cap below ₹1,000 crore, often targeted due to low liquidity and limited disclosures, will now face stricter monitoring. We believe this move will enhance transparency and reduce speculative activity, though it may temporarily impact liquidity and trigger corrections in overheated counters. Long-term, it’s a step toward a cleaner, more credible small-cap market,” Ajay Kejriwal, executive director at Choice Equity Broking.

Broader push

The revisions were finalised during a joint meeting between the market regulator and exchanges on Friday and are expected to benefit 28 companies currently under the surveillance framework. This move is part of SEBI’s broader push to ensure robust capital formation while safeguarding retail investors, particularly in the small and micro-cap segments, where sharp price swings and low disclosure standards have historically drawn speculative interest.

While market participants expect near-term cooling off in the space, many agree that the move lays the groundwork for a more credible small-cap ecosystem over time.

Published on July 28, 2025