A day to forget for small-caps as markets plunge

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BSE Sensex fell 1.2% to 72,761.89 points, their worst decline since 23 January. The broader market saw worse: The Nifty Small Cap 250 and the Nifty Mid-Cap 150 plunged 5.2% and 4.2% respectively, their steepest one-day plunge in over two years. Comments by the stock market regulator on a potential bubble in the stock market, and a crackdown on several errant companies by the central bank have added to concerns, at a time small and mid-cap stocks have far outpaced the market's gains.

The regulator's comments around valuations, impending disclosures of the stress tests at small and midcap funds, and lower liquidity in capital markets sparked the decline, said Nirav Karkera, head of research, Fisdom. “It seems that the initial bout of decline led to a series of stop-loss triggers that further amplified the selling spree. One can expect that the same led to margin calls being triggered and cases where liquidation of holding was opted versus putting up incremental margin money, stretching the decline further," Karkera said.

Earlier this week, Securities and Exchange Board of India chairperson Madhabi Puri Buch had pointed to the exuberance in some sectors. “It may not be appropriate to allow bubbles to keep building because when they burst, they impact investors adversely," Buch said. The regulator had observed “patterns of price manipulation" in new listings in small and medium enterprises, she added.

In the past one year, the Nifty Smallcap 250 has surged 51% and the Nifty Midcap 150 49%, while the Nifty 50 and Sensex gained 28% and 25% respectively. “With all the noise around, a sharp sell-off was certainly likely," said Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies. He emphasized that the