Context:
SEBI has introduced a revamped Enhanced Surveillance Mechanism (ESM) framework for small- and micro-cap companies, effective July 29, 2025. The move aims to curb speculative trading and protect retail investors amid overheated small-cap valuations.
Key Highlights:
- Revised ESM Shortlisting Criteria:
- Stage 1 Entry: Now includes positive price trends over the past 3 months, along with high-low price variation.
- Stage 2 Entry: Requires that shortlisted stocks also have either a negative PE ratio or a PE more than twice the Nifty 500 index.
- This ensures that only fundamentally weak or overvalued companies face stricter restrictions.
- Stage-wise Restrictions:
- Stage 1: 100% margin requirement, trade-for-trade settlement, 5% price band from T+2.
- Stage 2: More stringent measures apply only to companies with volatile prices and suspect valuations.
- Existing 2% price band stocks will retain the same cap.
- Market Capitalization Filter:
- Stocks with market cap below ₹1,000 crore, often lacking liquidity and disclosures, will face increased scrutiny.
- Impact on Market:
- Expected short-term dip in liquidity and momentum rallies.
- Aimed at long-term transparency, credibility, and retail investor protection.
- Will benefit 28 companies currently under ESM.
