Tweaking of ESM framework may not lift liquidity on micro-cap stocks: Experts
In a late-night twist on Tuesday, Stock exchanges have lifted trading restrictions on stocks (Market Cap Less Than 500 Crore) Which Comes Under Enhanced Monitoring Measures (ESM).
Under the revised ESM, exchanges will allow trade-for-trade (T2T) settlements with 100 percent margin on a daily basis from Monday. Earlier, trading was allowed once a week through a periodic call auction.
However, the voice against corporate ESM is getting louder, especially after Mercury EV-Tech moved the Special Securities Appeals Court (SAT). Traders and companies feel that it is too little and it will not serve the purpose of enhancing liquidity in those stocks.
Mercury EV-Tech claimed the stock became illiquid after it moved to ESM-II, where it was only allowed to trade once a week at a 2 percent price range. Interestingly, the revised standard goes into effect the day before Mercury EV-Tech’s case is due to be heard at the SAT on July 25th.
“Why Draw Insertion?”
Most of the ESM companies, which moved from the SME exchange platform to the major exchanges, questioned the exchange for charging annual listing fees and allowing trading only once a week.
Trading in ESM securities will be settled under the T2T mechanism in a 5 percent or 2 percent price band. Under the T2T settlement, investors are not allowed to buy and sell shares on the same day. The shares can be sold after only 2 days when they are delivered in the demat account. Shantanu Dutta, an independent market analyst, said that this mechanism in itself would create an artificial illiquidity in stocks.
Need more relaxation
Pulkit Sukhramani, Partner, JSA Advocates, said that while the ESM framework affects the market interests of companies, many of them, particularly in the second phase of ESM, are facing commercial issues. He said that investors could not get out of these companies because trading is allowed once a week and the shares of these companies have become illiquid.
“The recent circular allowed trading on all days. The regulator should take into account the problems the market is facing and we hope that more relaxation will be done in the future.”
However, Shruti Sodhi, partner at Khaitan Legal Associates, said that while restrictions under the ESM framework raised concerns about cash liquidity, which was also the main contention for Mercury EV-Tech, easing in the framework resolved those concerns. Sodhi said the shortlisting of securities under the ESM is done solely at the expense of market surveillance and should not be construed as a negative action against the company.