“The market regulator is taking preventive measures to curb the formation of a potential bubble by urging mutual funds engaged in small and mid-cap stocks to provide disclosures on stress testing,” revealed Madhabi Puri Buch, Chairperson of the Securities and Exchange Board of India (SEBI).
Speaking at an event hosted by the Association of Mutual Funds in India (AMFI) on March 11, Buch emphasized the importance of halting the expansion of a bubble, stating, “It may not be appropriate to allow that bubble to keep building because, if it keeps building, then when it bursts… and bubbles burst, by definition, then they will impact investors adversely.”
SEBI is set to unveil a disclosure format for stress-testing small- and mid-cap funds on March 15. This disclosure aims to provide investors with insights into the funds’ ability to navigate adverse conditions by specifying the number of days required for them to exit their underlying portfolio.
The initiative to introduce stress-testing disclosures for small and mid-cap funds stems from concerns regarding potential price manipulation within the SME segment, as highlighted by the chairperson during the event. Madhabi Puri Buch mentioned that the regulator has observed indications of manipulation within this segment and is actively taking measures to tackle this issue.
“Whether termed ‘froth’ or ‘bubble,’ the regulator cannot overlook such phenomena,” stated Buch, highlighting the need for proactive measures.
Regarding price manipulation concerns, Buch emphasized the regulator’s role in raising awareness rather than dictating specific risk management approaches. She encouraged industry stakeholders to collaborate in devising effective policies to address this challenge.
“Within each mutual fund, trustees are tasked with protecting investor interests. They should convene to craft a policy. If individual funds prefer to devise their own strategies for mitigating this risk, we fully endorse that,” she stated.
Buch also expressed willingness for industry-wide coordination, stating, “Should the sector unite to develop a shared policy, we are fully supportive of such efforts.