SEBI chairperson Madhabi Puri Buch on Monday red-flagged the SME segment, saying the regulator has observed 'manipulation'.
"Market has given its feedback. We are working on robust evidence and feedback for action," Buch said at an AMFI event felicitating women fund managers.
SEBI said that it has received feedback that some entities may be misusing provisions of small and medium enterprises' listings.
Buch said an optional T+0 settlement will be introduced from the end of March, providing an opportunity for investors to settle their stock market trades on the same day.
The move is aimed at ensuring markets do not lose competitiveness to any 'grey' market, Madhabi Puri Buch said.
"There may be pockets of irrational exuberance in the Indian equity markets, Buch said, referring to concerns over stretched valuations of small- and mid-cap stocks and large inflows into mutual funds investing in these segments.
SEBI has suggested mutual fund trustees look at whether lump sum investments into the small- and mid-cap funds are appropriate.
It is not appropriate to allow the froth to keep building, Buch said on Monday.
Recently, the markets regulator directed mutual funds to disclose stress test results of small- and mid-cap funds from March 15, to assess the time taken to exit positions in times of stress.
Since the beginning of 2023, the Nifty small-cap 100 and mid-cap 100 have risen 58% and 54%, respectively, outperforming the 23% rise in the benchmark Nifty 50