Small-cap stocks in India have seen a sharp correction, losing over $80 billion in market value in less than two weeks after regulators pointed out various risks.
Despite the recent dumps, small and mid-cap stock indices at the Bombay Stock Exchange have rebounded slightly. Investors are still not convinced about the performance of these stocks as they continue divesting from larger shares as well.
1. The Nifty small cap index corrected by 5% today, 12% off from its February peak, prompted by SEBI’s caution on frothiness and valuation concerns in small and mid-cap stocks.
2. SEBI and AMFI directed fund houses to provide additional disclosures to mitigate higher risks.
— Ishan Tanna (@IshanTanna1) March 14, 2024
The small-cap stocks market in India is currently an underperformer in the Asia-Pacific region after rallying for several years. However, the sentiment is now weakening. The MSCI India Index is now underperforming the MSCI Asia Pacific Index.
India’s stocks are now lagging behind the Taiwan and South Korean markets. Taiwan and South Korean stocks have been performing because of increased exposure to companies dealing in the chip and artificial intelligence market.
Small Cap Stocks in India Tank
A report by Bloomberg says that the concerns raised by regulators about the risks posed by small-cap stocks in India point towards an overvaluation of some stocks in India.
The market could continue performing poorly amid the upcoming national elections and the increased interest in the chips industry in other markets.
The report noted that the MSCI India gauge was trading at a 58% premium to other Asian stocks. The outperformance of this index points towards an overvaluation of the stocks.
MSCI India: new 20-year high: pic.twitter.com/gxfW7rQZ6a
— Market Monitor Pete (@peterintheblind) March 10, 2024
The Securities and Exchange Board of India (SEBI) is now expressing concerns about increased flows into small and mid-cap stocks, with this market now looking saturated. The massive rally into one of the riskiest areas in the Indian financial market over the past year is an issue.
The NSE CEO, Ashishkumar Chauhan, has now urged small investors who cannot manage high-risk levels to refrain from risky markets. The Indian securities regulator is now asking that funds formulate measures that will moderate inflows in plans and protect investors from the sudden redemptions happening in the market.
SEBI’s chairwoman, Madhabi Puri Buch, has also said that it was not “appropriate to allow bubbles to keep building because when they burst, they impact investors adversely. She also noted that the regulator would guide money managers in diversifying their small-cap portfolio using large-cap stocks.
Concerns about Price Manipulation
The SEBI chairwoman has also said that the regulator has detected a trend of price manipulation in the new listings happening for small companies. The increased regulatory scrutiny is affecting the initial public offerings (IPOs) happening this week and posting massive declines in their initial trading days.
The regulatory concerns are now seeing fund managers make some changes. ICICI Prudential Asset Management Co. is now planning to stop lump-sum deposits temporarily for mid and small-cap funds.
SEBI Comments and AMFI Disclosure started coming into play
ICICI PRUDENTIAL Mutual fund have suspended Lumpsum Investment in Midcap Fund and Small Fund and also capped the Investment through SIP Mode
Note :- Disclosure date is 15th March #stockmarketcrash #Midcap #smallcap pic.twitter.com/2IHDjnQwB7
— CA Abhay Varn (@AbhayVarn) March 14, 2024
Last month, Kotak Asset also set a limit on flows on recurring plans for the small-cap fund, attributing it to a sharp growth in the market. The fund manager said that the growth has resulted in “valuation distortions” in some instances.
The rally in small-cap stocks over the past year explains the growth of the Indian equity market. Retail investors have entered the space by storm and are now taking on too much risk than they could handle.
According to Bloomberg, the rally in small-cap stocks has seen some return gains of as high as 1000” within two years. The rally has led to questionable valuations for some companies and given them a size that is beyond their fundamental value.
With this valuation froth at play, likely, the recent $80 billion crash might just be the start and more dips are on the way.
Read More: Small-Cap Stocks Crash Sees Over $80 Billion Wiped From India’s Stock Market