Pockets of Froth in Mid, Small Caps that can Build into Bubble Says Sebi Chief
11 March 2024 5:45 PM GMT
Pockets of Froth in Mid, Small Caps that can Build into Bubble Says Sebi Chief
Mumbai: The Securities and Exchange Board of India (Sebi) chairperson Madhabi Puri Buch on Monday raised concerns about potential manipulation in the Initial Public Offerings (IPOs) of Small and Medium Enterprises (SME). Pointing out that the size of the issue as well as the free float of the SMEs were small, therefore their prices are “relatively easy to manipulate both at the IPO level and at the trading level. I think as a first step we are clear that some more disclosures are needed in terms of the risk factors.” Buch was speaking to women journalists on the back of Women’s Day.
Soon after her comments, the BSE SME IPO slumped over 3 per cent.
The Sebi Chairperson said that the regulator had attempted to provide a listing environment for SMEs that is more facilitative, and thus less regulated than listing for the mainboard. However, it received feedback from some entities misusing this facilitative framework. To mitigate that, the first step that SEBI took was applying measures like Additional Surveillance Measure (ASM) and Graded Surveillance Measure (GSM), which earlier were not applicable on the SME board.
To counter price manipulation, Buch stated the need for more disclosure in terms of risk factors.
Buch also mentioned that there are pockets of froth building up in the small and mid-cap space in the equity markets that have the potential to become a bubble and burst affecting investors. “On the small- and
mid-caps, we had analysed the data and in some cases the valuation parameters were off the charts and not supported by fundamentals and appeared to be a case of irrational exuberance.”
The markets' regulator has directed mutual funds to disclose stress test results of small- and mid-cap funds starting from March 15. This move aims to evaluate the time required to exit positions during times of market stress.
“Every mutual fund will carry the disclosure about how the numbers stack up in small-cap and mid-cap funds, so investors are aware about the possible outcome of investing in small- and mid-caps in a stressed
situation,” Buch said.
In addition, trustees also need to put in adequate risk management policies in place to avoid or mitigate risks arising from such bubbles and protect investors, she said. This is not something that the regulator has mandated but individual AMCs have been allowed to come up with their own risk management policies.
Buch also informed that T+0 settlement will be a reality by the end of this month, followed by instant settlement by next March. “The proposal to have stock trades settled on the same day will go into effect on March 28, on an optional basis for certain investors," she said. At present, the Indian stock market operates on a T+1 settlement
cycle for all scrips.
Soon after her comments, the BSE SME IPO slumped over 3 per cent.
The Sebi Chairperson said that the regulator had attempted to provide a listing environment for SMEs that is more facilitative, and thus less regulated than listing for the mainboard. However, it received feedback from some entities misusing this facilitative framework. To mitigate that, the first step that SEBI took was applying measures like Additional Surveillance Measure (ASM) and Graded Surveillance Measure (GSM), which earlier were not applicable on the SME board.
To counter price manipulation, Buch stated the need for more disclosure in terms of risk factors.
Buch also mentioned that there are pockets of froth building up in the small and mid-cap space in the equity markets that have the potential to become a bubble and burst affecting investors. “On the small- and
mid-caps, we had analysed the data and in some cases the valuation parameters were off the charts and not supported by fundamentals and appeared to be a case of irrational exuberance.”
The markets' regulator has directed mutual funds to disclose stress test results of small- and mid-cap funds starting from March 15. This move aims to evaluate the time required to exit positions during times of market stress.
“Every mutual fund will carry the disclosure about how the numbers stack up in small-cap and mid-cap funds, so investors are aware about the possible outcome of investing in small- and mid-caps in a stressed
situation,” Buch said.
In addition, trustees also need to put in adequate risk management policies in place to avoid or mitigate risks arising from such bubbles and protect investors, she said. This is not something that the regulator has mandated but individual AMCs have been allowed to come up with their own risk management policies.
Buch also informed that T+0 settlement will be a reality by the end of this month, followed by instant settlement by next March. “The proposal to have stock trades settled on the same day will go into effect on March 28, on an optional basis for certain investors," she said. At present, the Indian stock market operates on a T+1 settlement
cycle for all scrips.
( Source : Deccan Chronicle )
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