Small-caps sneeze, markets catch a cold
₹1879.23 crore and ₹200 crore respectively. However, the Nifty Midcap 150 and the Nifty Smallcap 250 fell more sharply by 1.8% and 1.89% each to 17749 and 14895.25, as panicky investors pulled out cash amid reports of regulatory concerns over too much money flowing into small-cap schemes. Though domestic institutions offset the FPI selling with provisional purchases of ₹1827.45 crore, FPI selling in the derivatives market dragged down the indices, market analysts said.
A senior fund official confirmed that stress test results of its small-cap fund were shared with the regulator, which has been holding discussions with fund houses over the past three-four months on curbing excessive cash flows into small-cap schemes. Sebi's concerns pertain to funds' ability to cope with redemption pressures in small-cap stock counters with limited free float. Coinciding with this, news of Kotak Mutual Fund placing temporary limits on investor subscription for units in its small-cap fund raised fears that other fund houses could also follow suit on valuation concerns.
Kotak MF has restricted lumpsum inflows into its smallcap fund to ₹2 lakh per PAN per month and systematic investment plan (SIP) flows to ₹25000 per PAN per month effective 4 March. Earlier, there were no such limits. "A few stocks in the small- and mid-cap segment have multiplied, and strong momentum is taking them beyond the fair value of businesses," Kotak MF wrote in a letter to its investors on 26 February, a copy of which Mint has seen.
“While India’s market capitalisation/GDP is hovering at a lifetime high of ~130%, small caps’ market capitalisation to overall market capitalisation has climbed to ~18.9%. Historically, the proportion has been ~10%," it said. "Retail
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