Rules vs. discretion in market surveillance: evidence from India, Nidhi Aggarwal, Surbhi Bhatia and Bhargavi Zaveri, NSE-NYU Working Paper, September 2020.
This paper examines the manner of implementation and the impact of a new surveillance measure, called the Graded Surveillance Measure (GSM) jointly implemented by the Indian securities exchanges and the Securities and Exchange Board of India (SEBI). Unique to the Indian securities market, the measure temporarily restricts trading activity in securities whose prices are not commensurate with the financial health of the firm, as pre-defined by the exchange. Using a unique hand compiled data-set of all the securities that were subjected to this surveillance action, we find that nearly a third of such securities did not satisfy the pre-specified criteria. More than half of the securities that exited the surveillance continued to exhibit the characteristics that subjected them to the restrictions in the first place, raising critical questions on the effectiveness of the measure. We find considerable ambiguity on the extent of trading restrictions imposed on such securities and the manner in which the restrictions are eased or tightened. We also find that securities which are subjected to this surveillance measure, experience a decline in stock prices and trading activity. Our paper contributes to a growing line of literature on the discretion applied by exchanges in surveillance practices and the quality of enforcement of rules.