Bubble bath on Dalal Street: Small, midcaps catch a cold

The fell 1.23%, or 906.07 points, to close at 72,761.89 and the 1.51%, or 338 points, to close at 21,997.70. Of the 50 stocks in Nifty, 43 declined. The selloff eroded India's market capitalisation by ₹13.5 lakh crore in a single day.

Analysts expect further declines with Kotak Securities' head of equity research Shrikant Chouhan predicting the Nifty to drop by 2-3% and smallcap and midcap indices to fall by 5-10%.

Agencies

PSU Shares Among Big Losers
Brokerage Prabhudas Lilladher said the Nifty is near a crucial support level of 21,900.

Concerns that more mutual funds may put restrictions on investor flows into smallcap and midcap schemes have fuelled the market nervousness. ICICI Prudential Mutual Fund said it will not accept lumpsum money in its mid- and small-cap schemes from March 14, while other fund houses like Nippon, Tata and SBI have already put curbs on lumpsum investments in smallcap schemes. These moves are expected to dampen purchases of smallcap shares, traditionally favoured by retail investors.

Unabated investor flows into these mutual fund schemes have been a key reason for the buoyancy in these segments in the past year despite growing unease around stretched valuations of smaller companies.

"Since more mutual funds are putting a cap on further investments in small and midcap stocks, worries about shrinking liquidity has led to profit booking," said Shrikant Chouhan, executive VP and head of equity research, Kotak Securities. "This is leading to a lack of buying interest in the segment and increased pressure on the markets."

Out of the 3,976 shares traded on the BSE, 3,569 fell, while 350 rose. The Microcap 250 index cratered 6.2%.

Notwithstanding recent calls of caution, the pace of drop in the broader market has taken market participants by surprise.

"The February to March period in an election year is typically characterised by weak sentiment," said Pankaj Pandey, head of research, ICICI Securities. "While a normal correction in small and midcap was expected, the intensity of the fall was sharper today."

In the past month, the midcap 150 and smallcap 250 indices have shed around 4% and 8%, respectively.

"Brokers' margin call could be at play in the small and midcap universe, where retail investors prefer to hold leveraged positions," said Ruchit Jain, lead research analyst at 5paisa Capital. "The unwinding of these positions on margins could also have contributed to the sharp nature of the fall."

Chouhan at Kotak said further liquidation of such positions may follow over the next few trading sessions.

Jain said the corrections are likely to last three to four weeks and the Nifty is expected to take positional support at 21,500 levels.