Securities and Exchange Board of India chairperson Madhabi Puri-Buch has expressed concern over the pockets of irrational exuberance in some parts of the equity markets, drawing attention to the stretched valuations in small- and mid-cap stocks.
Mutual funds have shovelled money into these segments and scored massive returns over the past year. But Puri-Buch is concerned that these returns won’t sustain and investors may be badly singed when the froth in the markets disappears.
Sebi has already asked mutual funds to carry out stress tests on their portfolios assuming different scenarios and the first result will come out by March 15. The stress test will indicate how many days it will take for fund houses to repay their investors due to large redemptions triggered by an adverse event.
The Association of Mutual Funds of India (AMFI) – the industry body that represents the interests of asset management companies – had recently issued a circular to fund houses asking them to publish the results of the stress tests on their websites and the AMFI at the end of each month.
Buch’s warning – sounded on the sidelines of an event in Mumbai on Monday — comes at a time when small and midcap stocks have outperformed frontline companies. As a result, the BSE small-cap index has rallied by more than 53 per cent (from January last year till last Thursday) and the midcap index by nearly 57 per cent, while the benchmark Sensex has risen by just 21 per cent over the same period.
The market regulator said these pockets of froth were “not supported by fundamentals at all” and appeared to indicate an “irrational exuberance”.
“It may not be appropriate to allow the bubble to keep building because when it bursts, it impacts the investors adversely. That is not a good thing,” she said.
The Sebi chairperson further disclosed that it has seen evidence of “price manipulation” in the SME segment, including both initial public offerings (IPOs) and secondary trading activity.
“We do see the signs (of price manipulation)’, we have the technology to monitor it. We can see certain patterns,” she said.
Asked if Sebi planned to crack down on the phenomenon by tightening rules, she said: “I’d say it is still on the kitchen table; it’s not yet gone into the oven (when Sebi will start public consultations before proceeding with a regulation).”
Buch said Sebi was working with advisors to understand the dimensions of the problem and would analyse the data. If some malpractices are found, the regulator will take the next step of issuing a public consultation. Buch said that investors need to understand that the SME segment is different from the main board and it is necessary for Sebi to nudge the companies to make the necessary disclosures to investors.
T+0 settlements
India will kick start a T+0 settlement mechanism in the equity segment on an optional basis from March 28, Puri-Buch said. This means that investors can opt to settle trades on the same day.
A T+0 settlement means that an investor who is selling shares will receive money on the same day. Currently, a T+1 system is followed wherein an investor buying shares will get delivery of shares (in his or her demat account) and the seller will get the funds on the day after the trade.
Sources said the market regulator will come out with a detailed circular soon which will shed more light on how the process will actually work.
Back in December, Sebi had floated a consultation paper on the subject. At that time, the regulator had proposed that under the optional T+0 settlement cycle, trades would be allowed till 1:30 pm so that the settlement could happen by the close of trading at 4:30 pm. Sebi is planning to start T+0 settlement in top 500 listed equity shares by market capitalisation.
The optional mechanism means that investors can still choose the T+1 system.
Last year, Puri-Buch had said that the regulator was looking to introduce T+0 by the end of March 2024 and follow it up with instantaneous settlements a year later.
