The BSE Notice That Led To Panic Selling Of Smallcap, Midcap Shares

Anotice by the Mumbai-based BSE brought stocks in the midcap and smallcap range tumbling down as a result of panic selling. While BSE issued clarifications to soothe nerves, these stocks continued to be offloaded. The smallcap index had closed 2.05 per cent lower on Tuesday while the midcap index had seen a 0.85 per cent lower slide. So, what caused the drop?

WHY ARE MARKET WATCHERS BLAMING A BSE CIRCULAR?
On August 9, BSE issued a circular that it will bring in a new surveillance mechanism, called ‘Add-on Price Band Framework’, for “securities listed exclusively on BSE Trading Platform” with an eye on curbing excessive volatility in certain shares.

The stocks that would attract the new price restrictions, BSE said, are those that have seen their value go up by at least six times in six months, or 12 times in one year, 20 times in two years, or 30 times in three years. Illustrating the mechanism, BSE said that for a stock with a reference price of Rs 10, the movement to attract the add-on price band will be as follows: 6 months: Rs 60 (600 per cent); 1 year: Rs 120 (1,200 per cent); 2 years: Rs 200 (2,000 per cent); 3 years: Rs 300 (3,000 per cent).

It said that per the new rules, which come into effect on August 23, “the shortlisted securities shall be subjected to additional periodic price limits viz. Weekly, Monthly and Quarterly price limits”, which would be in “addition to the applicable daily price bands of such securities”.

Price bands are a feature of Indian stock markets and they determine the range within which the value of a stock can fluctuate. According to upstox.com, “The NSE and BSE have set price bands for all securities. The price bands serve as boundaries for the stock’s trading; the exchange will not accept orders that are set outside the minimum and the maximum of the price range.”

“The purpose behind price bands and circuit breakers is to control mass buying or selling of shares and… perhaps most importantly, to curb panic selling,” it adds. However, the BSE circular on introducing additional price bands had the effect of sparking panic selling as holders sought to book profit, which is nothing but liquidating stocks to cash out the profits made.

WHAT HAS BSE SAID?
Witnessing the massive sell-off in smallcap and midcap stocks, the BSE clarified on August 11 that the new price band would be applicable only to those stocks that are priced at Rs 10 or more, and whose market capitalisation was less than Rs 1,000 crore. Further, it said that the “framework is applicable to BSE Exclusive securities in groups viz. X, XT, Z, ZP, ZY, Y”.

BSE said that the clarifications are being provided to simplify the “understanding and implementation” of the framework and are in “partial modification and supersession” of the August 9 circular.

Further, while BSE had in the earlier circular said that a stock placed in the Add-on Price Band Framework shall remain in the framework for “a minimum period of 90 calendar days”, it said on August 11 that the review period would run for 30 days and a stock placed under the framework “shall be eligible to move out if it does not qualify [under] the provisions of the above framework thereafter”. Review of the shortlisted securities shall be done on a monthly basis, BSE added.

On August 11, it also came up with an initial list of 31 companies that have been identified based on framework criteria.

WHY WAS THE ADD-ON PRICE BAND INTRODUCED?
The stock exchange had said that it was bringing in the add-on price bands as part of its “endeavour to maintain market integrity and curb excessive price movement”.

The smallcap index had reached an all-time high of 27,323.18 points on August 4 this year. On the same day, the midcap index, too, had hit a record peak of 23,478.8 points. News agency PTI said that this year, the smallcap index has gained 7,967.84 points or 44 per cent while the midcap index has rallied 4,820.62 points or 26.86 per cent.

Experts said that the idea behind introducing additional curbs on trading is because the stocks of the small and midcap companies are vulnerable to price manipulation by traders with a view to attracting individual retail investors, who may eventually end up losing money after going for a stock following a surge in its price.

BSE said that “the shortlisting of securities under [the] framework is purely on account of market surveillance and it should not be construed as an adverse action against the concerned company”.