Amid mounting concerns over the soaring valuations in the small-cap stock segment, India’s market regulator signaled a readiness to reassess the regulations governing mutual fund investments in this area. Chairwoman Madhabi Puri Buch of the Securities and Exchange Board of India conveyed to reporters in Mumbai on Monday that the regulatory body is open to revising the current mandate for small- and mid-cap funds, which mandates a minimum allocation of 65 percent of their assets to such stocks, should fund managers deem it as constraining effective risk management.
Her remarks coincide with growing apprehension among Indian regulators regarding certain sectors of the economy and markets displaying signs of overheating, driven by a surge in the nation’s equities. Last month, Sebi issued directives to fund managers, urging them to take measures to safeguard investors against the mounting froth in small- and mid-cap stocks, following substantial inflows into funds targeting these segments.
Small- and medium-sized companies have been pivotal in propelling the record-breaking rally in Indian shares over the past year, with funds focusing on these stocks garnering nearly 40 percent of the net equity inflows totaling $19.5 billion in 2023.
On Monday, a gauge measuring small-cap stocks experienced a notable decline of up to 1.7 percent, marking the most substantial intraday slide since March 6. This measure is currently trading at more than 22 times one-year forward earnings, surpassing the 10-year average. Notably, it surged by almost 50 percent in 2023.