Firms challenge trading curbs by stock exchanges; Sadbhav Infra moves SAT

Sadbhav Infrastructure Projects
Sadbhav Infrastructure Projects and some other companies recently put under the 'graded surveillance mechanism' (GSM) have moved the Securities Appellate Tribunal (SAT), challenging the move by stock exchanges.

GSM is meant to “enhance market integrity and safeguard interest of investors”.  Stocks put under this category have strict trading curbs such as a narrow price band and compulsory delivery.

The companies in question say they were given no prior intimation or details. On June 29, SAT directed the stock exchanges to withdraw the order and decide anew.

The orders were issued by the National Stock Exchange (NSE) and BSE on June 15, naming 73 companies. This included Sadbhav Infra, a Gujarat-based roads developer.

According to the exchanges, the shares of these 73 companies had seen abnormal price rise, not commensurate with their financial health and fundamentals such as earnings, book value or price to earnings ratio. Accordingly, the shares were put under GSM, for suspected price rigging or being under the ambit of shell companies. The idea was to alert the market onthe need for more caution on dealing in such stocks.

Sadbhav Infra contested the move and filed a petition, alleging the bourses provided no criteria for their classification, that the direction was issued without seeking any information or clarification and it only became aware when the order was put out.

SAT heard counsels on both sides and asked for withdrawal of the communication in question "in the peculiar facts of the present case", said presiding officer J P Devadhar's order. "While accepting the statement made by counsel on both sides, we permit BSE and NSE to withdraw the impugned communications…..with liberty to take a fresh decision within one week from today ( June 29)."

Sadbhav Infra, promoted by Sadbhav Engineering, has a market capitalisation of Rs 40 billion, with institutions such as HDFC MF, ICICI Prudential Life Insurance and Reliance MF as investors. It asked how with such a record they were being placed in the GSM category. Also, that there was no abnormal movement of the price of the scrip, leading to any suspicion about the trading. "It is apparent that the impugned directions are on a mechanical basis, which is not the correct way such a direction ought to be issued,” their petition argues.

Sources say more companies have also approached the markets regulator, Securities and Exchange Board of India (Sebi), on the move. Some have questioned the methodology adopted by the exchanges in preparing such a list.

Under stage-VI of the GSM framework, trading in these securities shall be permitted only once a month under the trade-to-trade category. Any upward price movement shall not be permitted beyond the latest traded price and an additional surveillance deposit of 200 per cent of the trade value shall be collected from buyers, retained with the exchanges for five months.
  • Some scrips, including that of Sadbhav Infrastructure Projects, moved to graded surveillance mechanism without notice
  • No specific detail was provided for such a move
  • Exchanges have given generic reference without any specifics

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