NEW DELHI: Shares of small and mid companies fell sharply on Wednesday over fears that the ‘bubble’ formed in certain pockets by relentless buying may burst anytime soon.
While the broader market has been under pressure since the capital market regulator Sebi late last month stepped to moderate inflows into small and midcap schemes, the selling has intensified in the past three sessions after Madhabi Puri Buch’s, Chairperson, Securities and Exchange Board of India (Sebi), remark that there are pockets of froth in the small and mid-cap space in the equity markets that has the potential to become a bubble and burst, affecting investors.
Nifty Smallcap 100 fell 5.3% on Wednesday, Nifty Midcap 100 dropped 4.4%. For the two indices, this was their biggest single-day fall in nearly two years. The selling was so widespread that only one stock in Smallcap 100 and two in Mid-cap 100 managed to settle in the green.
Arvinder Singh Nanda, senior vice-President at Master Capital Services, said when compared to their potential for profit growth, mid and smallcap stocks appear to be the most costly.
While there is a possibility of a major double-digit reduction, it is not guaranteed. Corrections have already occurred in these sectors, and if they persist, a more pronounced fall could follow, Nanda added.
Shiju Koothupalakkal, technical research analyst at Prabhudas Lilladher, said investors can stay light and avoid further addition of Mid-cap and Smallcap stocks till there is no clear conviction and confirmation of a revival for the indices. For Mid-cap index, a major revival to breach above 50EMA zone of 47,700 level is necessary to bring about some conviction and thereafter anticipate for further rise, added Koothupalakkal.
The mandated AMFI-SEBI stress test too is weighing on market sentiment. Sebi had directed the Association of Mutual Funds India (AMFI) to ensure that asset management companies (AMCs) prepare risk disclosures for investors regarding mid-small cap schemes and conduct stress tests which will be useful in figuring out if the portfolios are liquid enough to meet a sudden rise in redemptions.
Following this, big names in the mutual fund industry have started reducing exposure to midcap and smallcap stocks. Amid this increased scrutiny, raids against Dubai-based trader and alleged Hawala operator Hari Shankar Tibrewala added to a sell-off in small-cap stocks in which he has exposure.