Graded Surveillance Measure Explained: How GSM Works?

In India’s share market, investor protection and transparency are key priorities for regulators. To curb speculative trading and price manipulation in certain stocks, the Securities and Exchange Board of India (SEBI), along with the exchanges, introduced the Graded Surveillance Measure (GSM). This framework ensures that investors are well-informed about potentially risky or volatile securities before taking positions in them.

Let’s understand what this surveillance mechanism is, how it operates, and why it plays a vital role in maintaining market discipline.

What Is GSM in the Share Market?

The Graded Surveillance Measure, often referred to as the graded monitoring system, is a regulatory framework designed to identify and monitor stocks that show unusual trading patterns or price movements not supported by their fundamentals.

In simple terms, it is a tool used by stock exchanges like the NSE and BSE to protect retail investors from being lured into speculative or manipulated stocks. When a company’s share shows abnormal price behaviour—such as sharp rallies without corresponding improvement in financial performance—it may come under this surveillance list.

This measure doesn’t necessarily imply wrongdoing by the company; instead, it serves as a cautionary signal for investors to assess risk carefully.

Why Was the Graded Surveillance Measure Introduced?

The primary reason for introducing this graded surveillance framework was to curb excessive speculation and protect investors, especially small retail participants, from being trapped in price bubbles.

Before the system was implemented, several micro-cap and small-cap stocks witnessed dramatic price surges despite weak financials. Many investors suffered heavy losses when such stocks eventually corrected.

Therefore, SEBI and the stock exchanges launched this layered monitoring system to ensure early detection of risky securities and to apply appropriate trading restrictions in a phased manner.

Understanding the GSM Framework

The GSM framework operates in multiple stages, each with escalating levels of monitoring and trading restrictions. It works in coordination with the exchanges’ existing Surveillance Action Framework to enhance market stability.

Stocks are placed under this monitoring framework based on parameters such as:

• High price-to-earnings ratios not justified by earnings growth

• Low liquidity or sudden surge in volumes

• Abnormal returns over a short period

• Weak fundamentals, such as negative net worth or low profitability

When these indicators raise red flags, the exchanges classify such stocks into different stages of surveillance.

Stages of GSM and Their Implications

The graded surveillance mechanism consists of multiple stages, typically ranging from Stage I to Stage VI, with increasing restrictions as the risk level rises.

Here’s how it generally progresses:

• Stage I & II: Exchanges issue cautionary notices to investors, alerting them that the stock has been placed under enhanced monitoring.

• Stage III & IV: Trading restrictions may apply, such as allowing only delivery-based transactions (no intraday or speculative trades).

• Stage V & VI: More stringent actions are imposed, such as periodic call auctions, higher margin requirements, or even trading suspension in extreme cases.

Each stage acts as a layer of protection, ensuring that speculative activity is progressively controlled.

How the GSM System Works in Practice?

When a stock is identified for enhanced market surveillance, exchanges use a data-driven approach to monitor price and volume fluctuations daily.

If unusual activity continues, the security may move to the next stage of the graded monitoring system. These transitions are publicly disclosed on the exchange websites, ensuring full transparency for investors.

Once the trading pattern stabilizes and fundamentals justify price movements, the exchanges may remove the stock from this list after a review period.

Impact of GSM on Investors and Stock Prices

The inclusion of a company’s shares in the graded surveillance list can have both immediate and long-term implications.

• For Investors: It serves as a warning sign that the stock may carry higher risks. Investors should review the company’s financials and avoid speculative trades.

• For Stock Prices: The announcement often leads to lower trading volumes and a decline in price momentum, as speculative traders exit.

• For Market Integrity: It helps regulators maintain orderly trading and prevent manipulation in illiquid or small-cap stocks.

While the system might reduce short-term trading opportunities, it ultimately strengthens investor confidence in market fairness.

How to Check if a Stock Is Under GSM List?

To verify whether a stock falls under this surveillance framework, investors can:

1. Visit the NSE or BSE official website.

2. Navigate to the “Surveillance” or “Graded Surveillance Measure” section.

3. Search for the company name or symbol to see its current stage classification.

It’s advisable to perform this check before investing in small-cap or penny stocks, as being on the GSM list indicates elevated risk.

Liquid vs Illiquid Assets – A Broader Perspective

Although GSM primarily deals with stock surveillance, it indirectly relates to the concept of liquidity in financial markets. Highly liquid stocks (with frequent trading and strong investor interest) are less likely to fall under such measures, while illiquid securities are more prone to speculative manipulation.

Hence, understanding the liquidity status of your investments is equally crucial when evaluating their potential risks.

Conclusion

The Graded Surveillance Measure serves as a protective layer within India’s equity markets. It safeguards investors from risky and speculative securities by introducing a systematic, data-backed approach to market supervision.

For long-term investors, the presence of a stock under this framework should prompt deeper due diligence rather than outright avoidance. By staying informed and reviewing the underlying fundamentals, investors can make prudent decisions and navigate market volatility more confidently.

In essence, the graded monitoring system reinforces SEBI’s broader mission — ensuring transparency, accountability, and investor protection in India’s capital markets.