Why are midcap, smallcap stocks falling after Sebi chief's froth warning?
Stock Market today: Over 80 per cent stocks in the BSE Small-cap index have recorded negative returns since February 19.
The Indian stock market faced heavy selling pressure as majority of indices ended in red on Tuesday. Small-cap and mid-cap indices are still under huge selling pressure. Over 80 per cent stocks in the BSE Small-cap index have recorded negative returns since February 19 while in the same period, Nifty has gained nearly one per cent.
What are small-cap and mid-cap stocks?
Small-cap stocks are those that have a market cap of up to ₹5,000 crore. Mid-cap stocks are those which have a market cap of ₹5,000 crore to ₹20,000 crore.
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Sebi's froth warning on the markets
The pressure in the mid-cap and small-cap indices comes after market regulator Securities and Exchange Board of India (SEBI) raised concerns over froth building up in the segment.
Sebi chief on “of the charts” valuations
Sebi chief Madhabi Puri Buch said that there is "froth" in small and mid-cap stocks owing to "off the charts" valuations in these market segments.
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This indicates price manipulation in small and medium enterprises segment, she said, adding, Sebi is willing to review norms that mandate small and mid-cap funds to invest 65% of their assets in these stocks.
These segments' valuation parameters are "off the charts" and not supported by fundamentals, she said, continuing, “These appear, as regulators like to call it... ‘irrational exuberance’.”
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AMFI's step after Sebi's warning
Following the warning, Association of Mutual Funds in India (AMFI) directed mutual funds to go for stress tests every 15 days and disclose outcome from March 15 as well. This may have resulted in a churning in the small-cap and mid-cap portfolio of mutual funds. Earlier, SEBI had asked asset managers to give investors more information about risks associated with small and mid-cap funds.
