India may review rule for funds targeting overheated small-cap stocks
INDIA’S markets regulator said on Monday (Mar 11) that it is open to revising rules for mutual funds investing in small-cap stocks, amid rising concerns about stretched valuations for this segment.
The Securities and Exchange Board of India (Sebi) will review its rule that mandates small- and mid-cap funds to invest at least 65 per cent of their assets in such stocks, if fund managers find it is “restraining risk management,” chairperson Madhabi Puri Buch told reporters in Mumbai.
It is not appropriate to allow the froth to keep building, she added.
Her comments come amid Indian regulators’ growing concerns over some parts of the economy and markets showing signs of overheating due to a boom in the nation’s equities. Last month, Sebi asked money managers to take steps to protect investors from the froth building up in small- and mid-cap stocks, following large inflows into funds investing in these segments.
There may be pockets of irrational exuberance in Indian equity markets, the markets regulator said.
Sebi also said that it has received feedback that some entities may be misusing provisions of small and medium-sized enterprises’ (SME) listings. It is collecting evidence on concerns of price manipulation in the segment.
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An optional T+0 settlement will be introduced from the end of March, Sebi added, to provide 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, Buch said.
Shares of SMEs have powered the record rally in Indian shares in the past year, with funds focused on these stocks getting nearly 40 per cent of net equity inflows of US$19.5 billion in 2023.
Since the beginning of 2023, the Nifty small-cap 100 and mid-cap 100 have risen 58 per cent and 54 per cent, respectively, outperforming the 23 per cent rise in the benchmark Nifty 50.
A gauge of small-cap stocks dropped as much as 1.7 per cent on Monday, the biggest intraday slide since Mar 6. The measure trades at more than 22 times one-year forward earnings, higher than the 10-year average. It surged almost 50 per cent in 2023.
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