“Putting a stock in ESM is like putting it in jail,” writes an investor on Twitter. The statement might be too harsh, but there is some truth to it. Certain stocks under the ESM (enhanced surveillance measure) framework are allowed to trade only once a day, which affects the company’s reputation.

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This is why BSE-listed Mercury EV Tech has challenged the framework at the Securities Appellate Tribunal. “It is difficult for our shareholders and our company. The exchange and the regulator should consider a company’s business model before taking such a step,” Jayesh Thakkar, Chairman, Mercury EV Tech, told Moneycontrol.

As the name suggests, the company is involved in the manufacture of electric vehicles. According to Thakkar, several EV models developed by the company are now awaiting iCAT approval. iCAT stands for International Centre for Automation Technology, which certifies vehicles after testing their emission, power, etc.

Some vehicles awaiting approval are its electric rickshaw, garbage collection van, school van, and car, said Thakkar.

What is ESM?

On June 4, markets regulator SEBI (Securities and Exchange Board of India) and the exchanges jointly decided to introduce the ESM framework for highly volatile "micro-small" companies. These are companies with a market cap of less than Rs 500 crore. As per SEBI, high-low price variation and close-to-close price variation are the parameters used to shortlist securities under this framework.

In stage I of the ESM framework, the trading of the securities is settled through a trade-for-trade mechanism with a price band of 5 percent, or 2 percent, in case the scrip is already in the 2 percent band. But this is not what companies are cribbing about.

It is stage II they have a problem with. Here, the settlement will be done through a trade-for-trade mechanism with a price band of 2 percent. But more importantly, the trading for these securities will be permitted once a week (Monday or first trading day of week), with periodic call auctions.

Breaking down the jargon

The trade-for-trade segment is where shares are bought and sold on a delivery basis. These stocks cannot be sold on the same day and are not qualified for intraday trading. Under the periodic call auction mechanism, six auction sessions are held throughout the trading day, each lasting an hour. All orders received are matched and the resulting trades are confirmed.

Basically, these two measures ensure that shareholders cannot buy or sell at any time of the day at their whim and fancy.

Here’s how dealers explain the entire scenario: promoters of several micro-small companies, with the help of operators, pump and dump shares. Both buyers and sellers collude in jacking up prices, usually by passing on shares in circles, to lure retail investors. Once retail investors dive in, the manipulators sell their holdings and book massive profits. Most of these companies have no income, no profits, and no real business model to show.

The ESM framework has made such shenanigans difficult. So why the complaints?

Since June 2022, Mercury EV Tech’s shares have gone from Re 1 to Rs 25. That is a 2,400 percent return. This explains why several investors have taken to Twitter to complain about the stock being in ESM. One wrote, “SEBI has put half of my portfolio in ESM Stage 2. Kreon, RIR, NINTec, Mercury EV everything in ESM Stage 2.”

“Brokers don’t allow you to trade in ESM stocks without a 100 percent margin. So liquidity starts drying up,” said the founder of a financial services firm on condition of anonymity. Take Mercury EV Tech for example. Before the stock was put in ESM, its weekly volumes were anywhere between 1-3 million. Now, it ranges between 20,000-50,000.

Moreover, being classified as ESM affects a company’s reputation. It becomes difficult for the promoter to raise capital and get loans. Promoters who have pledged shares might find it difficult to maintain the value of the collateral. As the price falls, banks offload stake leading to even more intense selling.

“Not all ESM companies are khokha (empty). Some have genuine balance sheets and are doing real, on-ground work,” said the aforementioned founder. “It is like the police failing to spot a thief, and then deciding to beat up everyone on the street,” he added.

Anand Mohan, Mentor, Equity Bulls, makes a pertinent point: "Companies in the ESM framework are paying listing fees for the full year. Why allow the listing of small companies then? One should remember that many of today’s large cap stocks were small- or micro-cap at some point of time.” He believes this action penalises investors who want to sell their holding but have to wait for the once-a-week auction.

Crane manufacturing company Brady & Morris has written to the BSE ‘requesting’ it to remove the company’s shares from ESM.

“The current scenario caused by the movement in the share price of the company is purely market driven and the management of the company is in no way connected,” it wrote in an exchange filing dated July 13.

The bottomline is, there are good apples and bad ones. As Abhishek Banerjee of Lotusdew Wealth puts it, “If the exchange is preventing trading, it is hurting its own business in the spirit of compliance.”

Now SEBI — amid formulating guidelines for fin-fluencers and asking for additional disclosures from foreign investors — has a new issue to deal with.

Mercury EV Tech’s next hearing is on July 25, till then #ReconsiderESMStage2 calls are only getting louder on social media.