The selloff in mid-cap and small-cap stocks has intensified as brokers ask clients to liquidate their leveraged bets in the wake of regulatory warnings. The recent crackdown on Dubai-based hawala operator Hari Shankar Tibrewala for stock manipulation has triggered panic among market operators, who are said to be cutting their positions. As many as 70 stocks with more than ₹1,000 crore in market capitalisation have declined between 15% and 50% in the last five trading sessions, while another 250 stocks have dropped 10-15% during this period.
The BSE Midcap index fell 2% in the five trading sessions, the BSE Smallcap index declined nearly 5.9%, and the Microcap 250 index dropped 7%. In contrast, the Sensex was up 0.3%. Analysts believe that the capital market regulator’s heightened scrutiny of smaller shares, amid concerns that they are overheated after a run-up in the past year, has been a trigger for the selloff.
Brokers are responding to the market conditions by asking clients to cut their stock positions, particularly those built on loans, ahead of the financial year end on March 31. Investors are also reshuffling their portfolios for tax purposes. The recent statement from the market regulator has increased selling pressure on small stocks. Mutual funds have been asked to do stress tests on their small- and mid-cap portfolios and restrict fresh investments. Brokers are asking their clients to lower leveraged positions to clean up their books.
The mid-cap index fell 1.3%, the small-cap index dropped 2.1%, and the microcap 250 index declined 2.6% on Tuesday. The clampdown on Tibrewala extended the sell-off in several penny stocks. Out of the 3,967 stocks traded on the BSE, 3,272 dropped, while 625 gained.
Analysts believe that smaller shares were vulnerable to a decline due to rich valuations, and the regulator’s remark only acted as a trigger. The BSE Midcap index surged 61% in the last year until February 19, while the BSE Smallcap index rose 63% during this period. The Sensex gained 22%. Many small-cap and micro-cap stocks gained between 100% and 300%.
However, analysts are advising caution in the space at this juncture. They recommend investors to exercise caution in allocating funds to small and mid-cap stocks. It is crucial to be prepared for the inherent volatility in these stocks and to buy quality mid- and small-cap companies with proven track records of timely execution, a strong management team, and manageable leverage in a staggered manner.
(Source: Economic Times)
