Enhanced Surveillance Measure ESM: NSE Stage I and II Rules for Small Caps

Trade small caps long enough and one morning your broker will want the full trade value upfront on a stock you’ve held for weeks, and intraday square-off will be off the table. Often the reason is a surveillance tag, and for companies with a market capitalisation below ₹1,000 crore, the tag to know is the Enhanced Surveillance Measure (ESM), a framework the exchanges run with SEBI. This guide walks through how a stock gets into enhanced surveillance measure ESM, what changes at Stage I and Stage II, and how it gets out, with rupee examples you can check on a calculator.

Everything below is drawn from NSE’s circular NSE/SURV/69315 dated July 25, 2025, which carries the current version of the framework. Where a number comes from somewhere else, we say so.

What the enhanced surveillance measure ESM actually is

ESM is a pre-emptive surveillance framework. It doesn’t wait for a scam or an investigation. It looks purely at price behaviour, and if a small company’s share price has swung far more than its peers, the exchange tightens the rules on how that share can be traded.

Three points from the circular are worth keeping in mind before getting into the mechanics:

• It applies to companies with a market capitalisation of less than ₹1,000 crore.
• Securities on which derivative products are available are excluded from shortlisting. So an F&O stock won’t be shortlisted.
• Shortlisting is “purely on account of market surveillance” and, in NSE’s words, should not be construed as an adverse action against the company.

That last point matters. An ESM tag is a statement about how the stock has been trading, not a verdict on the business. A genuinely good small company can land in ESM after a sharp re-rating, and a weak one can stay out of it if the price hasn’t moved much.

ESM also doesn’t replace anything. The circular says it works in conjunction with every other surveillance measure the exchanges impose. If you want the wider map, our guide to the ASM and GSM surveillance frameworks covers the other two lists you’ll see on NSE.

How it got here: from ₹500 crore to ₹1,000 crore

The 2025 circular traces ESM back to an NSE circular dated June 2, 2023, and lists four amendments in between. Business Standard reported that the framework was expanded in August 2024 to cover mainboard companies under ₹1,000 crore of market cap.

The most recent revision came out of a joint surveillance meeting of SEBI and the exchanges on July 25, 2025, and took effect from July 28, 2025. It changed two things: the criteria for shortlisting a stock, and the criteria for moving it between stages. The actual restrictions at each stage stayed exactly as they were. Business Standard reported that the changes were expected to benefit 28 companies.

Getting shortlisted: the Stage I entry tests

A stock enters Stage I if it meets either of two price tests. Both use corporate action adjusted prices, so a bonus issue or split doesn’t trigger anything on its own.

Test 1, high-low variation. The stock’s high-low price variation over 3 months, 6 months or 12 months must be at least one standard deviation of the high-low variation of all companies below ₹1,000 crore. It must also clear a minimum floor: more than 75% over 3 months, more than 100% over 6 months, or more than 150% over 12 months. Since the 2025 revision, there’s a third condition: the stock must also show a positive close-to-close price variation over the last three months.

Test 2, close-to-close variation. The stock’s close-to-close variation over 3, 6 or 12 months must be at least one standard deviation of the same measure across all companies below ₹1,000 crore, and above a floor of 50% over 3 months, 75% over 6 months, or 100% over 12 months.

The positive close-to-close condition in Test 1 is the quiet but important change. Under the old wording, a stock that spiked and then crashed back could show a huge high-low range and still qualify on that test. Now, through the high-low route, a stock has to have actually gone up over the last three months.

ESM doesn’t ask whether a company is good or bad. It asks one question: has this share price moved much more than other small companies? Everything else follows from the answer.

Worked example 1: does our stock get shortlisted?

Take a hypothetical company, Konkan Polymers, with a market cap of ₹640 crore and no derivatives. Over the last three months:

• Closing price three months ago: ₹120
• Closing price today: ₹195
• Lowest price in the period: ₹110
• Highest price in the period: ₹205

Close-to-close variation is (195 − 120) ÷ 120 = 62.5%. That is above the 50% floor for three months. For the high-low test, the circular doesn’t spell out the formula, so we’ll use the common reading of (high − low) ÷ low: (205 − 110) ÷ 110 = 86.4%, above the 75% floor.

Now the part you can’t compute at home. Both tests also need the stock’s variation to be at least one standard deviation of all companies below ₹1,000 crore, and the exchange calculates that number across the whole universe. Suppose, purely for illustration, that the standard deviation for three-month close-to-close variation works out to 45%. Konkan’s 62.5% clears it, so the stock would qualify under Test 2 alone. It would qualify under Test 1 as well, since the three-month close-to-close move is positive.

If the true standard deviation that week were 70%, Konkan would not qualify under Test 2 despite rising 62.5%. That’s why you can’t predict ESM inclusions with certainty from price data alone, and why the list is worth checking weekly if you hold small caps.

What changes in Stage I

Once a stock is in Stage I, two restrictions kick in:

• 100% margin from T+2 day. You pay the full trade value as margin. No leverage.
• Trade for trade settlement with a 5% price band, or 2% if the stock was already in a 2% band.

Trade for trade is the one that surprises people. As we explained in the ASM and GSM guide, settlement in such stocks happens trade by trade with no netting, so buying and selling the same shares within the day to square off isn’t possible. Every buy has to be paid for and every sell has to be delivered.

Worked example 2: the cost of Stage I

Say you want 500 shares of Konkan Polymers at ₹195. The trade value is 500 × ₹195 = ₹97,500.

• Before ESM, assume (as an example only) your broker asked for 20% margin: ₹19,500.
• In ESM Stage I, margin is 100%: the full ₹97,500.

That’s five times the cash for the same position. And with the 5% band, the stock can move at most ₹9.75 from the previous close of ₹195 in a day, so it trades between ₹185.25 and ₹204.75. If it were already in a 2% band, the limit would be ₹3.90, a range of ₹191.10 to ₹198.90. How bands are set more generally is covered in our explainer on NSE price bands and circuit limits.

The practical fallout is obvious once you see it. Intraday traders have little reason to stay, liquidity can thin out, and anyone who wanted to exit fast now has to fit through a narrower door each day.

Stage II: the 15%, 30% and PE tests

A stock already in Stage I moves to Stage II if its price keeps running. The circular sets two price conditions, either of which counts:

• Close-to-close variation of +15% or more over 5 consecutive trading days, or
• Close-to-close variation of +30% or more on a monthly basis.

Since July 2025, the price condition alone isn’t enough. The stock must also have a PE ratio that is zero or negative, or more than two times the PE of the benchmark Nifty 500 index. In plain terms, Stage II is now aimed at stocks that are both rallying hard and either loss-making or priced far above the broad market.

Stage II is much tighter than Stage I:

• Trade for trade settlement with a 2% price band
• 100% margin
• Trading on all trading days, but only under the periodic call auction mechanism, with a ±2% price band

The periodic call auction is the big one. Instead of the normal continuous session, the stock trades only through call auctions, so the quick fills most of us take for granted go away.

Worked example 3: price test passes, PE test decides

Konkan Polymers is in Stage I at ₹195. Over the next five trading days it closes at ₹204, ₹212, ₹219, ₹223 and ₹226. All five closes fit inside a 5% band from the day before. The five-day close-to-close variation is (226 − 195) ÷ 195 = 15.9%, which is at least +15%. So the price test is met.

Now the PE test, with numbers we’re assuming for the example. Suppose the Nifty 500’s PE is 24, so two times that is 48.

• Case A: Konkan’s trailing EPS is ₹3. PE at ₹226 is 226 ÷ 3 = 75.3. That is above 48, so the stock moves to Stage II.
• Case B: Trailing EPS is ₹6. PE is 226 ÷ 6 = 37.7, below 48 and positive. Same rally, but the stock stays in Stage I.
• Case C: The company made a loss, so EPS is negative and PE is below zero. The stock moves to Stage II.

Case B is what the 2025 change was about. A profitable small company whose rally is backed by earnings no longer gets pushed into call auctions just for moving fast.

The same 15.9% five-day rally can send one small cap into call auctions and leave another in Stage I. The PE test is now what decides it.

How a stock gets out of ESM

The exit rules are where patience comes in. Per the circular:

• Stage-wise reviews, both for moving down a stage and for exit, happen every week.
• A security becomes eligible for exit after completing 90 calendar days in the framework.
• A security in Stage II has to stay there for at least one month. After that, at a weekly review, if its positive close-to-close price variation in a month is less than 15%, it can move back to Stage I.
• Exit after 90 days is stage-wise, and only if the stock doesn’t meet the entry criteria again.

When a stock leaves ESM, its price band goes back to whatever it was before it was shortlisted, unless it’s caught by some other surveillance measure, in which case that framework’s band applies.

Worked example 4: counting the days

Suppose Konkan enters ESM Stage I on August 4 and moves to Stage II on September 1.

• The earliest it can drop back to Stage I is after one month in Stage II, so from the first weekly review on or after October 1, and only if its positive monthly close-to-close move is under 15%.
• Ninety calendar days from August 4 falls on November 2. Only after that does exit become possible, and it happens stage by stage at weekly reviews, provided the stock doesn’t meet the entry criteria again.

So a stock that got pushed into Stage II will, at best, spend about three months under some ESM restriction. If you bought into a hot micro cap hoping to flip it in a fortnight, that’s a long time to have your money stuck behind a 2% band.

What we’d actually do as an investor or trader

A few habits help:

• Check the list before you buy a small cap, not after. The exchanges publish the list of shortlisted scrips, and it changes at the weekly reviews.
• Size positions for 100% margin. If a stock is up 50% or more in three months and sits under ₹1,000 crore of market cap, assume it could be shortlisted and keep the position small. Our risk management in trading guide covers position sizing.
• Don’t read ESM as a sell signal on the business. The exchange itself says it isn’t an adverse action against the company. It’s a liquidity and leverage problem for you, not necessarily a red flag on the company’s accounts.
• Watch the PE. For a stock in Stage I, a loss-making profile or a PE above two times the Nifty 500’s is what turns a strong week into Stage II.

One more detail from the circular: market makers in these scrips still have to follow SEBI’s market making obligations while the stock is in ESM. That’s relevant mainly for SME-platform stocks, where market makers are part of the setup.

Quick answers

Is ESM the same as ASM? No. ASM and GSM are separate frameworks with their own criteria. ESM is aimed specifically at companies below ₹1,000 crore of market cap, and a stock can be under more than one measure at the same time.

Can an F&O stock be in ESM? No. Securities with derivative products available are excluded from shortlisting.

Can I trade intraday in an ESM stock? Not in the usual way. Both stages use trade for trade settlement with 100% margin, so intraday netting isn’t available.

How long does ESM last? At least 90 calendar days before exit is possible, with a minimum of one month in Stage II for stocks that reach it.

The company and figures in the worked examples are hypothetical and for illustration only. This article is for education and information, and is not investment advice. Please consult a SEBI-registered investment adviser before making investment decisions.