Sebi's multi-cap tweak: Mid, small-cap stocks poised for Rs 40k cr windfall

India's mid- and small-cap stocks are set to receive a boost after the regulator tweaked rules for multi-cap mutual funds, a move analysts say could push about 400 billion rupees ($5.4 billion) to the broader market.

Multi-cap funds must hold at least 75% of their assets in equities -- up from 65% at present -- with 25% each in large, medium and smaller companies to ensure they stick to their mandate of investing in a wide set of stocks, the Securities & Exchange Board of India said in a circular late Friday.

The ruling that lays out how equity assets are to be spread across segments is aimed at balancing the playing field in a polarized market, where a handful of large companies have helped the main stock indexes erase the bulk of virus-induced losses even with India becoming the new global Covid-19 hotspot. Multi-cap funds hold 74% of their 1.4 trillion rupees of assets in large-cap stocks, according to JM Financial Research.

“Many multi-cap funds have traditionally been run with a large-cap bias, in the range of 60%-75%, with some going even as high as 85%-90% depending on their views on relative valuations between the three segments,” said Kaustubh Belapurkar, director of fund research at the Indian unit of Morningstar Investment Adviser.

The mid-cap segment may get 130 billion rupees, while 270 billion rupees could flow to smaller companies as managers rebalance portfolios, Belapurkar said. JM Financial estimates the total inflow at 411 billion rupees. Funds have up to February 2021 to meet the new allocation norms.

 

Smaller companies -- the stars of India's market in 2017 -- have trailed the benchmark indexes in the past two years, as investors sought the safety of the biggest stocks amid headwinds from the crisis in the shadow bank sector and the slowdown in economic growth even before the pandemic struck.

The S&P BSE MidCap Index fell for a second straight year in 2019, even as the main S&P BSE Sensex posted its fourth annual advance.
 

A move by Sebi to standardize classification across funds in 2018 led to most fund flows moving to the top 100 companies. Friday's order aims to restore the balance, analysts said.

“Whether it can be attributed to Sebi's earlier categorization or not, mid-cap indexes have slid throughout the two-year period as the money flowed into large-caps,” said Vidya Bala, head of research and co-founder at Chennai-based Primeinvestor.in. “With small companies under stress for funding, it is possible the regulator sees the need for re-distribution of money in the capital market.”

--With assistance from Ashutosh Joshi.