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Why YES Bank, DHFL did not hit lower circuit limits on Friday?

Here is a lowdown on everything you need to know about circuit breakers/circuit limits.

Swati Verma  |  New Delhi 

Equity market witnessed a roller coaster ride on Friday with stocks across the board falling like a pack of cards. The S&P BSE Sensex saw a jaw-dropping 1,500-point swing, while shares of YES Bank and DHFL, bled a whopping 34 per cent and 60 per cent, respectively in intraday trade before recovering a bit. However, the trend left many of us thinking why these stocks did not hit lower circuit limits, like it happens usually. Also, what are circuit filters/circuit limits, what are its significance and how do they work? Here is a lowdown on everything you need to know about circuit breakers/circuit limits. There is no price band for stocks in F&O segment The reason why YES Bank and DHFL did not hit circuit limits is because they are a part of derivative markets / F&O segment. In case of stocks, the price threshold is known as price bands, which are only available for stocks that are not a part of F&O. Even if the stock has no derivative, but is part of an index which has its own derivative contract, it will not have price bands. "Stocks which are in F&O don't have circuit limits. So, since both YES Bank and DHFL are part of F&O segment, hence they did not hit lower circuits on Friday," said Darpin Shah, AVP at HDFC securities. What are circuit limits/circuit filters? Circuit filters/limits are stipulated price limits of any index/stocks. The term 'circuit limit' is used for indexex, such as S&P Sensex and Nifty50. For individual stocks, the term is known as price band. In essence, a circuit limit/price band is a range provided for each index/stock. It contains an upper limit and a lower circuit limit. The index/stock cannot fall below the lower limit or climb above the upper limit. These limits are based on the previous day's closing price. Circuit limits for stocks and index are different.

The circuit limits for index are decided by Sebi while for stocks, bourses take a call.

Circuit limits of Nifty (Source: NSE)

Trigger limit Trigger time Market halt duration Pre-open call auction session post market halt
10% Before 1:00 pm. 45 Minutes 15 Minutes
At or after 1:00 pm upto 2.30 pm 15 Minutes 15 Minutes
At or after 2.30 pm No halt Not applicable
15% Before 1 pm 1 hour 45 minutes 15 Minutes
At or after 1:00 pm before 2:00 pm 45 Minutes 15 Minutes
On or after 2:00 pm Remainder of the day Not applicable
20% Any time during market hours Remainder of the day Not applicable
What is upper circuit limit/lower circuit limit? Upper circuit Upper circuit is the upper limit/upper end of the price band of the stock which means the price of the stock cannot be traded beyond (read above) that stipulated upper limit on that particular day. If the stock or index touches any of the upper or lower limits, trading is suspended. Lower circuit Lower circuit is the lower limit/lower end of the price band of the stock which means the price of the stock cannot be traded if it breaches the stipulated upper limit on that particular day. Objective of circuit limits The main purpose of circuit limits is to control extreme volatility and check manipulation of the stock prices. Stocks are influenced by a slew of factors such as company financials, investor's perception of the company's growth, any positive/negative rumours about the company industry trends, government regulations, market speculation, among others. There are instances, where a company’s stock price has jumped or crashed beyond their reasonable limits due to some rumours, speculations or tweets by influential entity/person. Hence, to protect the interests of small investors, circuit limits was introduced by Sebi. Also, even long-term investors benefit from such limits. Suppose, if you bought a stock at Rs 50 five years back. You are comfortable that it has touched Rs 500 today, only to let it fall back to Rs 100-levels in the course of one single day. A circuit limit avoids such drastic crashes. Should one steer away from stocks that often hit upper or lower circuits? Not really. G Chokkalingam, founder & managing director of Equinomics Research & Advisory, says if the volatility of any stock is huge, investors should study the stock on the basis of four parameters. This includes a company's management quality, leveraging, working capital stress and the valuation comfort. However, he cautioned that retail investors should not invest directly, unless they are professionals. They should go to mutual fund route or fund advisors.
First Published: Mon, September 24 2018. 11:53 IST