Indian Equities face turbulence as regulatory concerns trigger market correction

The Indian equity market witnessed a significant downturn recently, driven by concerns raised by the securities regulator regarding overheating and froth in smaller stocks. This article explores the factors contributing to the market turbulence and the regulatory response to mitigate risks.

Market Downturn

Indian equities experienced a notable setback as smaller stocks faced their worst single-day drop in over two years. Small and mid-cap stocks gauges plunged more than 4% each, with the main S&P BSE Sensex Index tumbling 1.2%, erasing gains made earlier in the month. The decline was widespread, impacting almost all members of the S&P BSE Smallcap Index.

Regulatory Concerns

The Securities and Exchange Board of India (SEBI) voiced concerns about froth in the market, particularly in low-float stocks. Nilesh Shah, Managing Director at Kotak Asset Management Ltd., emphasized the need for regulatory action to address risks in mid-and small-cap stocks.

Market Value Erosion

The S&P BSE Small Cap Index suffered a loss of over 40 billion in market value within two weeks following SEBI’s warnings about overheating. Approximately 15% of the index’s 446 members witnessed significant erosion in their value during this period.

Investor Outlook

Some investors anticipate further losses in the small and mid-cap space, suggesting that the correction may not be immediate. Porinju Veliyath, Founder and Portfolio Manager at Equity Intelligence Ltd., highlighted ongoing frothiness in certain market segments and suggested that corrections could provide entry opportunities for quality stocks.

Regulatory Response

SEBI expressed concerns about large flows into small and mid-cap stocks, hinting at potential bubbles forming in the market. Chairwoman Madhabi Puri Buch emphasized the need to manage risks associated with overheating, indicating openness to allowing money managers to hold more large-cap stocks in their small-cap portfolios.

Impact on IPOs

SEBI’s remarks also affected initial public offerings (IPOs), with the S&P BSE SME IPO Index plummeting 15% this month. Mainboard IPOs faced a similar fate, dropping over 11%, reflecting investor apprehensions regarding price manipulation and overheating in new listings.

Industry Response

In response to regulatory concerns, several asset management firms have taken proactive measures. Reliance Prudential Asset Management Co. announced a temporary halt on lump-sum deposits in its mid and small-cap funds starting March 14. Similarly, Kotak Asset Management imposed limits on flows on recurring plans in its small-cap fund to address valuation distortions.

Conclusion

The recent downturn in Indian equities, driven by regulatory concerns about froth and overheating in small and mid-cap stocks, highlights the importance of proactive risk management in volatile market conditions. Investor sentiment remains cautious amid ongoing market corrections, underscoring the need for vigilance and strategic investment approaches to navigate turbulent times effectively.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.