The mid and small-cap indices took a significant knock on Wednesday, as regulatory concerns around their valuations gained ground amid investors. In addition, there are talks that some fund houses could be pruning their holdings because they need to have enough cash in their hands to meet any redemption pressure.
The S&P mid-cap index fell 4.20% while the S&P small-cap index fell 5.11%. Since the regulatory noise about the ‘froth’ in these segments started gathering steam in the last week of February (27), with the Association of mutual funds in India (Amfi) writing a letter to fund houses to have a policy that would take proactive measures not just limited to moderating inflows and portfolio rebalancing, the mid-cap index has lost over 5% while the small-cap index has lost almost 12%.
Benchmark indices, the BSE-30 Sensex and Nifty50 also fell 1.2% and 1.5%, respectively. Foreign institutional investors sold shares of Rs 4,595 crore whereas domestic institutional investors bought shares worth Rs 9,093 crore.
Investor wealth eroded by Rs 13.47 trillion on Wednesday. In the past three trading sessions, Rs 20 trillion of investor wealth has been wiped out. Almost 500 stocks or 22% listed with the National Stock Exchange hit the lower circuit.
On Monday, the Securities and Exchange Board of India (Sebi) chairperson Madhabi Puri Buch expressed her concerns about the rise in valuations in certain pockets of mid and small-cap funds.
Fund houses have been mandated by the Sebi to give a disclosure on March 15 containing details about the number of days the scheme will require to exit from their underlying portfolio in cases of a stress situation.
Said Shankar Sharma, founder, GQuant Investech, “In a raging bubble-like bull market, the market needs a reason, any reason to fall. And it got one in the action of the enforcement directorate on a certain group of investors and by the securities regulator. But the real reason was that when the market starts rewarding people who are absolutely clueless about companies, businesses or financial analysis, you know that the end is near.”
Market experts believe that this fall could continue in the short term, as investors as well as fund managers adjust to new realities. With some fund houses already limiting inflows into their mid and small-cap schemes such as, ICICI Prudential, Kotak Mahindra, Nippon, among others, there will be a cooling off period for many overvalued stocks.
“Investors have been dabbling in the mid and small-cap stocks very aggressively for over a year. The correction is reminiscent of 2018 when among other reasons, these stocks fell sharply due to reclassification of mid-cap and small-cap funds by Sebi, leading to realignment of funds according to the new norms,” said a fund manager who did not wish to be named.
The small and medium enterprises (SME) initial public offer (IPO) segment has also been under pressure in the past couple of days. The SME-IPO index fell 5.53%. In the last couple of days, it has fallen over 10%.
Among Sensex stocks, financial stocks such as ICICI Bank, Kotak Bank, HDFC Bank and Bajaj Finance were marginally up by less than a percentage point. ITC, however, was the star of the day rising over 8% intra-day to close at 4.5% up. Tata Steel, Power Grid and NTPC all lost over 5% today.
Adani group stocks were the biggest losers today, wiping out market cap of over Rs 1.13 trillion. While Adani Green and Adani Total Gas lost over 9%, all other group stock fell by over 4%.