Sensex and Nifty have recouped entirely from a fatal crash they suffered in February after a catastrophic jump in the US Volatility Index. But the calm in global financial markets has not cheered India’s small- and mid-cap stocks, a large number of which are down between 30-70 per cent, reviving memories of the bear market following the 2008 crash. What ails them? Experts say, three main policy measures implemented by SEBI may be the reasons.

The promoter of one of Mumbai’s oldest broking houses told BusinessLine that SEBI’s move asking mutual funds (MFs) to restructure schemes for small- and mid-cap stocks is a chief cause for the sell-off in this segment. SEBI directed MFs to cut down the number of schemes and broadly have only large-, small- and mid- schemes in the category and further sub-category.

“SEBI’s criteria for re-categorising stocks baffled the street. The definition was strange and confusing as parameters were vague,” said the broker.

“Over 44 per cent of total MF schemes had to be re-adjusted in three months, which started a wave of sell-off in small- and mid-cap stocks and showed no sign of ebbing till June.”

SEBI defined large-caps as the first 100 stocks by market-cap, mid-cap from 101 to 250, and small-cap (stocks below 251), which it said will be updated half yearly.

Suddenly, the pool became smaller and MFs put curbs on inflows into small- and mid-cap schemes.

Weightage worries

Reportedly, funds including DSP BlackRock, Mirae Asset, IDFC, L&T and other large players had put temporary curbs on inflows in schemes as it became difficult to increase weightage of particular stocks in portfolio. Prior to the SEBI move, there were 42 MFs with 315 equity schemes, of which 44 per cent by value were categorised as large-, mid- or small-caps. All were impacted by SEBI’s new norm. CLSA estimated that large-cap stocks were to receive ₹3,500 crore worth additional flows on restructuring. But brokers say, such allocation was at the cost of small- and mid-cap stocks.

“When markets were yet to digest one shock, there came another from SEBI, which was putting stocks under ASM category. The way it was done, proved a liquidity killer,” said the CEO of an institutional desk at another Mumbai brokerage.

ASM and short-selling

ASM or additional surveillance measure is where stocks are put under scanner for suspected manipulation. Over a dozen stocks in the first list of ASM that was put out on May 31, saw a sharp fall as a few operators are said to have accessed their names ahead of the official announcement and made a killing by short-selling. This spread panic as a large number of small- and mid-cap stocks that were included in the ASM crashed in June.

“Most HNIs started liquidating their small- and mid-cap portfolios amidst the scare as nobody knew if their holding would be in the ASM list the next day, making exit difficult. There was a rush to exit,” the CEO said.

Data from exchanges show delivery volumes in equity markets fell below 35 per cent in May and June, a four-year low. The pool only shrank further for institutions to buy as they do not prefer less liquid stocks.

Brokers say, the criteria for physical settlement has been another of SEBI’s policy measure that has caused pain. Settlement in 46 stocks should be done with physical delivery over a couple of days prior to its expiry. Now, nobody wants to trade in these stocks, brokers say.