Sebi chief flags risk of bubble in stock market

livemint.com:

MUMBAI : Bubbles in the market are not a good thing for retail investors, and mutual funds could form a common policy to protect investors in this respect, the stock market regulator said, at a time of turbulence in an overheated small and mid-cap space. The Securities and Exchange Board of India (Sebi) has already asked for results of stress tests from mutual fund (MF) trustees, stating the time it would take to liquidate portions of investors’ portfolios. “There are pockets of froth...

sections of froth in the market," Sebi chairperson Madhabi Puri Buch said on the sidelines of an event in Mumbai on Monday. “Some people call it a bubble, some may call it froth. The question is, it may not be appropriate to allow that bubble or froth to keep building.

Because if it keeps building, it will burst, because by definition, bubbles burst. So, when they burst, they impact the investors adversely; so, that’s not a good thing." Buch’s comments come in the backdrop of relentless flows into small- and mid-cap funds, stretching valuations in these segments. For instance, the Nifty Smallcap 250 index has risen almost 60% in the past one year against the benchmark Nifty 50’s 28% return.

However, these stocks have seen turbulence in recent weeks, after the Reserve Bank of India restricted operations of fintech major Paytm, and of NBFCs IIFL Finance and JM Financial Products. On Monday, the smallcap index plunged 2% to 14,507.15, while the benchmark Nifty fell 0.72% to 22,332.65. In addition to the recent action against NBFCs, the Enforcement Directorate’s ongoing investigation to find if proceeds of crime from the Mahadev betting case were routed into the smallcap and SME segments of the market also contributed to Monday’s carnage.