Why are small-caps and mid-caps falling? Here is why one needs to calm down!

India has one of the strictest price regulations in terms of circuit filters at 2 per cent, 5 per cent, 10 per cent and 20 per cent along with the Additional Surveillance Mechanism as implemented by stock exchanges.

There could be several reasons why a particular stock may fall. There could be several reasons why equity markets as represented by Sensex and Nifty fall. But when only small-caps and mid-caps are falling while the large caps outperform there has to be a specific reason affecting the price momentum. 

What led the broad-based selling in the broader markets is the circular published by BSE few days ago where the Asia’s Oldest Exchange, BSE said that beyond the current strict measures of circuit filters and additional surveillance mechanism, BSE is mulling to impose further restrictions and curbs on price movement of the shares that trade on its platform. The stocks in discussions do not belong to the F&O segment. 

The surveillance measures are not related to the fundamentals of the company. NSE currently has at least 400 stocks under long-term ASM while 28 are under short-term ASM. 

India has one of the strictest price regulations in terms of circuit filters at 2 per cent, 5 per cent, 10 per cent and 20 per cent along with the Additional Surveillance Mechanism as implemented by stock exchanges. The market participants including stock brokers where not happy about the idea of further restrictions being imposed on the stock price movement which could further make price discovery difficult and restrict free price movement of shares. 

The new restrictions threated to slow the pace at which the stock price can rise and that spooked the investors and stock brokers. The move, clearly not appreciated by investors and brokers was reflected in heavy selling in broader markets in past three to four sessions at least. 

BSE, on its part does not want to be seen as allowing price manipulator to use its platform and hence the circular was published. BSE has about 4,748 stocks listed on its platform out of which 3,899 stocks are available for trading. Several BSE listed companies are small cap companies and trade with very low volumes and hence are prone to manipulation. Recently several such low volume stocks on BSE have increased manifold in prices which clearly are not backed by fundamentals. BSE intends that investors should not lose money in such speculative stocks and restrict activity in stocks by placing curbs on price action. 

If we go by the latest development, there are talks going around in the markets that BSE may not finally impose the new surveillance, in addition to the ones already present. The announcement is expected anytime soon. Once the announcement is made public, the interest in broader markets may revive sooner than what is suggested by the current downslide in the markets. 

There is a good chance that the broader markets sentiment may improve in coming days if BSE comes out with an announcement of withdrawing its circular that spooked the investors and stock brokers alike.