SEBI flags froth in small, mid-cap stocks

SEBI warns of irrational exuberance in Indian equity markets, suggests stress tests for small- and mid-cap funds.

There may be pockets of irrational exuberance in the Indian equity markets, markets regulator Securities and Exchange Board of India (SEBI) said on March 11, referring to concerns over stretched valuations of small- and mid-cap stocks and large inflows into mutual funds investing in these segments.

SEBI has suggested mutual fund trustees look at whether lumpsum investments into small- and mid-cap funds are appropriate. It is not appropriate to allow the froth to keep building, SEBI Chairperson Madhabi Puri Buch said on Monday.

Recently, the markets regulator directed mutual funds to disclose stress test results of small- and mid-cap funds from March 15, to assess the time taken to exit positions in times of stress.

Since the beginning of 2023, the Nifty small-cap 100 and mid-cap 100 have risen 58% and 54%, respectively, outperforming the 23% rise in the benchmark Nifty 50.

Despite concerns over elevated inflows into the segments, small-caps led the charge among equity mutual fund inflows in February, data from an industry body showed on March 8.

SEBI also said on March 11 that it has received feedback that some entities may be misusing provisions of small and medium enterprises' listings. The regulator is collecting evidence on concerns of price manipulation in the segment.

It said an optional T+0 settlement will be introduced from the end of March, providing an opportunity for investors to settle their stock market trades on the same day. The move is aimed at ensuring markets do not lose competitiveness to any 'grey' market, Ms. Buch said.