Markets hit by small and mid-cap volatility

Bengaluru: Investors lost Rs 13.47 lakh crore on Wednesday amid selling across sectors and the benchmark Sensex crashed over 900 points, as overall market sentiment was soured due to a massive selloff of shares of smaller companies.

This comes just days after Securities and Exchange Board of India chairperson Madhabi Puri Buch said that the markets regulator has observed signs of manipulation in the trading of small and midcap (SME) shares.

On Wednesday, The S&P BSE SmallCap index plunged 5.11 per cent while the MidCap index tanked 4.20 per cent. The Nifty500 index, which represents more than 95 per cent of the capitalisation of companies listed on the National Stock Exchange, fell 2.6 per cent

The drop was somewhat softer on the benchmark indices, as the 30-share BSE Sensex fell 1.23 per cent to sink below 73,000 levels, while Nifty 50 tumbled 1.51per cent or 338 points to 21,997.70. Foreign investors pulled out a net Rs 4,595.06 crore, data on NSE showed.

On Monday, Buch had voiced concerns about irrational exuberance in Indian small and mid-cap stocks. "There are pockets of froth in the market; some call it a bubble. It may not be appropriate to allow that bubble to keep building because, when it bursts, it adversely impacts investors," she had said.

Market experts who spoke to DH, largely agreed with Buch and said the volatility in the MSE space is expected to continue.

"More correction can be expected because even now the mid and small-caps are overvalued," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, adding that the firm has maintained a partial profit booking stance on smaller stocks since January, 2024.

Between February 14 and March 13, 2024,  the S&P BSE SmallCap and MidCap indices have fallen 9.28 per cent and 4.24 per cent, respectively.

A Dalal Street analyst, who did not wish to be named, said that this volatility is primarily being driven by promoters themselves, as they gain to benefit from a sharp upswing in stock prices of their own companies.

"There are instances where promoters are approached by high net-worth participants, the big bulls, who convince them that their shares are undervalued and that such participants would want to help in buying more shares of the company," the analyst said.

Sugandha Sachdeva, founder of SS Wealth Street foresees these MidCap and SmallCap indices ending the calendar year on a negative note. She expects a meaningful correction to take place following the general elections.

In light of the observations tied to froth and manipulation in the SME stocks, Sebi had directed mutual fund trustees to carry out tests, to assess the time taken to exit positions in times of stress. The results of these stress tests will be presented to the markets regulator on March 15.

"The results shall vary across a wide array… at an aggregate level, it is expected to be within reasonable bounds," Nirav Karkera, who heads research at financial services provider Fisdom, said.

"This is a time when investors should be giving priority to safety over returns and safety is in large caps," Vijayakumar advised.