A day to forget for small-caps as markets plunge

The Nifty 50 fell 1.5% to 21,997.70 points, while the S&P 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 recent market upswing had set the stage for imminent corrections. However, long-term investors can rest assured as the narrative of India’s long-term prospects remains intact, he added.

These corrections are expected to wipe out the froth in the market and present some opportunities for fresh bets.

“There seems to be a sense of distress and despondency among retail investors today. The dichotomy underlines the risk arising from the inclination to chase momentum and speculative stocks by many investors rather than invest sensibly in a well-balanced portfolio,” said Gaurav Dua, senior vice-president and head, capital market strategy at Sharekhan by BNP Paribas.

Barring Nifty FMCG, all sectoral indices on the NSE ended in the red.

Shares of public sector undertakings (PSU) that had grabbed investors’ attention lately witnessed a sharp fall. The S&P BSE PSU index closed 6% down at at 17,494.12 points, the lowest since April 2021. The fall was driven by a correction in NTPC Ltd, Power Grid Corp. of India Ltd, Coal India Ltd, and Oil & Natural Gas Corp. Ltd, that were down 5-7%.

Adani group stocks plunged as well, with combined market capitalization of its 10 listed companies down a staggering ₹1.13 trillion (7.15%) to ₹14.71 trillion.

“Low-float stocks are creating some form of froth in the market,” Nilesh Shah, managing director at Kotak Asset Management Ltd, said at an industry event in Mumbai. The regulator “should do more to put guard rails around mid-and small-cap plans,” he said.

Meanwhile, shares of ITC closed over 4% higher, after a wholly-owned subsidiary of British American Tobacco Plc sold 3.5% stake in the cigarettes-to-hotels conglomerate. The sale involved 436.85 million shares changing hands at ₹400.25, amounting to ₹17,484.98 crore on the BSE through bulk deals.

The Government of Singapore bought 91.54 million shares for Rs400.25 each, totaling ₹3,664.12 crore, while ICICI Prudential Mutual Fund acquired 5.9 million shares for ₹400.25 each, valued at ₹237.19 crore. Mint had reported on March 11 that ICICI Prudential Mutual Fund may pick a stake in ITC.ks