Smallcap shares see meltdown; 1,050 stocks hit lower circuits; what's next?

Smallcap stocks were battered badly on Wednesday, with the benchmark BSE Smallcap index plunging over 4 per cent, burning retail investor pockets. The selling spree was so harsh that 1,050 stocks, mostly smallcap and midcaps, hit their lower circuit limits on BSE. Sebi's warning of valuation froth in the midcap and smallcap space and the announcement of halt in lumpsum payments by a couple of large mutual fund houses weighed.

Among the BSE SmallCap 250 index constituents, KIOCL had hit its 10 per cent lower circuit limit at Rs 372.30. IRB Infrastructure Developers Ltd and HUDCO were locked at their 10 per cent lower circuit limits. Tata Investment Corporation Ltd, HUDCO, MMTC, Network 18, TV18 Broadcast, SPARC and NBCC were  a few other stocks hitting their 5 per cent lower circuit limits. 

To add to prevailing concerns, the mandatory disclosure format for mutual funds shared by Sebi to look at the stress situation in the funds, will be out by March 15. This is also adding to the smallcap selloff, analysts noted.

Wednesday saw S&P BSE SmallCap index tanking 2,073.10 points, or 4.84 per cent intraday, to 40,758.19. Smallcap stocks such as Phoenix Mills, Suzlon Energy, Jindal Stainless, Nalco, Prestige Estates, RVNL and NCC contributed most to the index's slide.

At a low of 40,734.77, the index was down 13 per cent over its record high of 46,821.39 hit last month.

There was a long list of 240 shares, mostly small and midcaps, under NSE's ASM long-term framework; some 33 other stocks were under the exchange's short-term ASM framework. Sebi in order to enhance market integrity and safeguard interest of retail investors have been introducing various enhanced pre-emptive surveillance measures. Shortlisting of securities under ASM is purely on account of market surveillance.

"Excessive liquidity drove up midcap and smallcap stock prices, often exceeding their justified values based on earnings. The surge in funds flowing into these segments compelled fund managers to invest, further inflating valuations. Authorities have acknowledged the situation and proposed potential regulations. Given the historical volatility of small and midcap stocks, it's crucial for investors to exercise caution in allocating funds, whether directly in stocks or through mutual fund SIPs," said Gaurang Shah, Senior Vice President, Geojit Financial Services.

To sum up the recent market concerns, market veteran Shyam Sekhar in a March 8 post on X said: "Most of the returns in smallcap funds is essentially beer froth. Impact cost is what people seem to mistake for returns. Continuously buying the same set of shares has raised all boats. It has little to do now with fundamentals. Now, a selling spree can teach a lot of one trick ponies real investing. The trigger has been pressed," he said.