Circuit Breaker Limits & Rules In Indian Stock Market

Stock Market returns are always said to be the luck and risk game. Once you are a pro in this game, you either turn to be a millionaire or billionaire. But the starting for even a millionaire to reach there was a struggle no one talks or learned about. Though, bragging about the stock market won’t cover the fact even this market suffers fluctuation that can go extreme. These losses will be beared by investors and traders then.

Introducing Circuit-breaker to the Indian stock market ensures that no losses or barrier comes between the investor’s motivation, money, and the stock’s fluctuation and value in the stock market. It enables investors to freely source any stock. 

We will help you understand the mechanism of the circuit breaker and what rules are applied to make it work? The technical part of it. What are the benefits of this to make the market run smoothly?

What Is A Circuit Breaker?

You might have heard this word often used by electricians. The circuit breaker is a kind of stop-button to the flow of electricity to ensure there is no overload or danger. Likewise, this principle is used to cut the loss in the Indian Stock Market. 

Circuit Breaker In The Indian Stock Market

The stock market is often misunderstood as the way of earning money through gambling. This has increased fluctuation in the market and a huge loss is witnessed. Some experience loss and on the other hand, others take advantage of it and gain profit. Looking on to this problem, the Securities and Exchange Board of India(SEBI) thought to do something for investors and traders.

SEBI in June 2001, introduced an Index-based market-wise circuit breaker rule in India. When the stock market goes down beyond the level, these circuit breaker triggers generate chaos and panic among investors. This chaos leads investors to make quick decisions to sell their stocks at low prices so that they won’t face loss again. In the fear that their stock might get overvalued. Thus, this bulk sale of shares results in the stock market crash. This is when circuit breaker’s roles come to play. The crash is stopped by the circuit breaker then and there. 

According to SEBI, the stock market circuit breakers are triggered at three stages of the index movements: 10%, 15%, and 20%. When the market decided to trigger these stages, there is a halt nationwide in the equity and equity derivative market. If BSE Sensex is about to fall 10% at midnight, the circuit trigger will be triggered for 45 minutes. If it goes to 15% at 2 pm, the circuit trigger will be triggered will be halted till the remaining of the day.

Stock Market Circuit Breakers In India

Stock Market Circuit has never been a new thing in India, ever since the stock has moved up and down that made the stock trading miserable. Since the beginning, the stock circuit breaker has occurred in 2004, 2006, 2007, 2008, and 2009. 

The Bombay Stock Exchange benchmark Index Sensex crashed of 842 points during the intra-day trade on May 17, 2004. So, twice in one day of trading, there was a temporary stoppage due to BSE and NSE. In 2001 by SEBI, this scenario was the first time when the trading was stopped due to a lower-circuit breaker limit breach since the introduction of the index-based market-wide circuit breaker. 

A similar case was witnessed on May 22, 2006, October 17, 2007, and January 22, 2008, where the lower circuit was breached by a few stocks, and the market was in the temporary stoppage. 

In 2009, the scenario was quite opposite when the stock market was touching heights, and then it was put to a halt. This was the first time the circuit was called off for upper limit demands. This took place when UPAs coalitions decisive electoral won the 15th Lok Sabha elections.

Recent Stock Market Circuit Breaker Scenario

This recent scenario will help you understand the concept even better. As you sat inside your home to let the pandemic over, all kinds of business, tourism trading was closed. The pandemic and lockdown made it shut for a long while.

Sensex on March 23, 2020, was struggling to rise and it eventually ended up falling by 2991 points or can say 10% at 9:58 am. On the other hand, NIFTY50 plugged from 822 points to 7923 points is 9.40%. This led to a circuit breaker trigger on both the BSE and NSE. Trading on these exchanges halt for 45 minutes and 15 min pre-open session, restarted at 10:58 am. 

The market vitality might get stopped with the help of circuit breakers but cannot avoid the fall of the stock market. Soon after this event, 10 days after again market witnessed a lower limit breaker on 13th March 2020. At this time of trading halt, NIFTY was 10.7% or 966.10 points down and Sensex was down by 9.43% or 3090.62 points at 29678.52. Due to this, the stock market was at a halt for 45 minutes, and then 15 minutes pre-open session was called to auction.

Advantages and Disadvantages of Circuit Breaker Rule 

Advantages
  • This allows traders and investors to think about their investing decision. Also, it leds the market to cool down with sudden chaos. This halt time gives investors to make a sensible move by looking on to the news and gather information.
  • It eradicates the panic scene and overwhelmed the investors to calmly make the further investing decision. 
Disadvantages
  • A circuit-breaker avoids the real-time price movements, this makes it problematic to know the real price of the market.
  • Early traders and investors might get more leverage of the news before the circuit triggers. This might be an advantage for them but a loss for others. While the one unaware of the halt might fall to lose.

What Is The Duration Of The Stock Market Halt?

The details and duration of the stock market depend on the SEBI guidelines. The table mentioned below gives a rough idea of how halt duration occurs:

Trigger LimitTrigger TimeMarket Halt DurationPre- Open Call Session
10%Before 1:00 PM45 Minutes15 Min
At Or After 1:00 PM to 2:30 PM15 Minutes15 Minutes
At or After 2:30 pmNo haltNot applicable
15%Before 1:00 PM1 hour 45 minutes15 Minutes
At Or After 1:00 PM to 2:30 PM45 minutes15 Minutes
At or After 2:30 pmRemainder of the dayNot applicable
20%At Any TIme During Market HoursRemainder of the dayNot applicable
Table 1: SEBI Stock market Halt Duration based on the index-based market-wide circuit breaker rule

Some Frequently Asked Questions (FAQs)

What Happens After The Circuit Breaker Triggers?

As per the guidelines mentioned above in the table, soon after the circuit breaker triggers the trade is put to a halt. Once the halt time is passed, the trading continues after the pre-open auction call session is put to an end. After this, the trading continues normally as per the normal guidelines unless and until the next circuit breaker is activated. 

What Are The Lower And Upper Limit Circuits?

The lower and upper circuit is the mechanism in the stock market which is used to halt the surge or plunge of stock prices beyond a limit. It checks the volatility swings of stocks in the market.

Why Are The Circuits Used?

An unwanted surprise in the stock can be suppressed by this circuit in the stock market. This makes investors or traders take a breather in the race. Investors may at times end up losing massive capital in the surge or plunge of the market. When the market is all-time low and all-time high, traders may have to face margin calls from brokers in that case. 

Shivangi Singh

Shivangi Singh

I am currently pursuing my Bachelor's in Aerospace Engineering in my final year at the University of Petroleum and Energy Studies. I like to read books and learn new things that help me in my overall growth. I am a people person and love to know and interact with new people. I also like to visit new places and learn about its culture, food and history.

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