Smallcap selloff brings worst day in two years for Indian stocks

Mar13,2024



Indian equities took a hit as small stocks suffered their biggest one-day decline in more than two years as the securities regulator raised concerns about fraud.
Small- and mid-cap shares fell more than 4%, while the main S&P BSE Sensex index fell 1.2% to wipe out this month's gains. The fall was widespread, hitting almost all of the 1,139 members of the S&P BSE Allcap index.
“Low-float stocks are creating some kind of froth in the market,” Nilesh Shah, managing director of Kotak Asset Management Ltd., said at an industry event in Mumbai. “The regulator should do more to curb mid-cap and small-cap schemes,” he said.
The market value of the S&P BSE Small Cap index has declined by more than $40 billion in less than two weeks after the regulator flagged the risks of overheating in shares of smaller companies. About 15% of the index's 946 members have wiped off a fifth or more of their value during the period. Some investors expect losses to deepen.
“The space was very hot and the correction could not be done in a hurry,” said Porinju Veliyath, founder and portfolio manager at Equity Intelligence Pvt Ltd. Ltd. “There is still a lot of froth in many areas,” he said, adding that the slowdown could provide investors with entry points into quality stocks.
'Price manipulation'
The Securities and Exchange Board of India is concerned about large inflows into small- and mid-cap stocks amid a massive rally in the riskiest part of the country's $4.5 trillion market over the past year.
“It would not be appropriate to allow bubbles to continue forming because when they burst, they have an adverse impact on investors,” Chairman Madhabi Puri Buch said earlier this week. He said SEBI is ready to allow money managers to hold more large-cap stocks in their small-cap portfolio for risk management.
Buch further said that the regulator has noticed a “pattern of price manipulation” in new listings taking place on the platforms for smaller companies.
The S&P BSE SME IPO index, which is an indicator of small and medium-sized enterprises, has fallen 15% this month, while the index of mainboard IPOs has fallen more than 11%.
In light of the regulator's comments, ICICI Prudential Asset Management Co on Tuesday said it has temporarily stopped lump sum deposits in its mid- and small-cap funds from March 14. Last month, Kotak Asset had imposed a cap on inflows into its small-cap recurring schemes. The fund cited the sharp boom in this segment as having led to “valuation distortions” in some cases.



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