The BSE faces a larger outgo after regulatory clarity on the fee to be paid to the Securities and Exchange Board of India (Sebi) as a turnover charge on options volume. The market regulator on Friday directed the exchange to pay a regulatory fee on the 'notional value' of annual turnover.
Mutual funds (MFs) scooped up smallcap shares across sectors such as healthcare, banking and financial services in March 2024 amid a near 4.5 per cent fall in key smallcap indices. Aster DM Healthcare, NLC India, and Aavas Financiers topped the list of most-bought stocks in the Rs 10,000-40,000 crore market capitalisation (mcap) bracket, according to a study by Nuvama Alternative & Quantitative Research. Aster and Aavas had corrected by 13 per cent and 10 per cent in March, respectively, while NLC India ended the month with a 2.5 per cent gain.
Foreign portfolio investors (FPIs) from Mauritius may face higher scrutiny after the amendment in the India-Mauritius tax treaty introduced a principle purpose test (PPT) to prevent treaty abuse by taxpayers. The Mauritius government had in February decided to amend the double taxation avoidance agreement (DTAA) with India to align with the Organisation for Economic Co-operation and Development's proposal on base erosion and profit shifting. Although the agreement between India and Mauritius was signed on March 7, the protocol of the amendment was made public for the first time on Wednesday, said legal experts.
HDFC Bank's latest shareholding data showed that the room for foreign investment has fallen just 5 basis points short of the threshold set by Morgan Stanley Capital International (MSCI) to fully include the stock in its indices. Currently, the index provider has applied an adjustment factor of 0.5 since the foreign room is less than 25 per cent. Removal of the adjustment factor will result in inflows of a massive $4.8 billion (Rs 40,000 crore) into HDFC Bank, according to Brian Freitas, a New Zealand-based analyst with Periscope Analytics.
Smallcap mutual funds recorded net outflows for the first time in 30 months in March as investors pulled out money after the markets regulator, the Securities and Exchange Board of India (Sebi), warned against "froth" in the mid and smallcap space. Active equity mutual fund (MF) schemes raked in Rs 22,600 crore in March. The March inflow is 16 per cent lower than the two-year high inflow of Rs 26,860 crore in February, shows data from the Association of MFs in India (Amfi).
Exchange-traded currency derivatives volumes are likely to drop in view of new Reserve Bank of India (RBI) rules, casting a cloud over further participation of retail investors and proprietary traders. There are concerns that existing positions without any underlying exposure will need to be liquidated. Also, weighed down by dollar demand from local oil companies and weakness in its Asian peers, the rupee on Wednesday (April 3) ended at a new closing low of 83.44 versus the US currency.
'Exposure to small and midcap stocks exceeded desired levels in many portfolios, prompting rebalancing.'
Retail investors now own a larger share of smallcap companies than they did a year ago, thanks to their conviction in mutual fund (MF) schemes focused on this segment. Data from Capitaline shows that MFs' average holding in the National Stock Exchange Nifty Smallcap 250 Index stood at 9 per cent at the end of the October-December quarter of 2023-24 (FY24), up from 7.76 per cent in the same quarter of 2022-23.
Small and midcap schemes may impose restrictions on redemptions, cap employee withdrawals, and increase the exit load, while ensuring a proportionate liquidation of the portfolio during market crises to safeguard the interests of all investors. These measures have been outlined in the investor protection policies recently put out by mutual fund (MF) trustees. The policies for small and midcap schemes were prepared by MF trustees following directives from the Securities and Exchange Board of India (Sebi) earlier this month.
The National Stock Exchange (NSE) on Tuesday said it has halved the lot size for trading derivatives contracts for the Nifty 50 index to 25 and also reduced the lot sizes of the Nifty Financial Services and Nifty Midcap indices as part of its periodic revision. "All contracts, i.e. weekly, monthly, quarterly, and half-yearly expires available for trading from the trade date of April 26, 2024, onwards will be with the revised market lot size," the NSE said, referring to applicability of the change for Nifty 50. The lot size in the derivatives segment refers to the fixed number of shares in a unit or group for which contracts are traded.
Real estate investment trusts (Reits) are in talks with regulatory bodies - the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) - to seek changes in regulations that will allow easier access to capital. The Indian Reits Association (IRA) said it has approached the market regulator seeking to get classified as an 'equity' asset, which will open the path for their inclusion in equity indices and also make investment by mutual funds (MFs) easier. The association is also in active discussions with the RBI to allow banks to lend to a Reit.
Equity mutual fund (MF) schemes have raked in Rs 46,200 crore in net lump-sum inflows in the past six months (ended February 2024), almost thrice the inflow in the previous six-month period.
The froth in the small and midcap (SMID) space is limited to a few pockets, but regulatory scrutiny could lead to sustained volatility, observe India's top-drawer wealth managers. They add that they have been advising clients to reduce their exposure to smallcaps. Anand Rathi Wealth, which manages investor wealth through mutual funds (MFs), reports that its exposure to smallcap stocks, both through MFs and directly, has decreased by nearly 7 percentage points in the past few months, now standing at 23 per cent.
In addition to regulatory actions against small and midcaps, tighter liquidity conditions are another headwind that stocks are facing this month. Market observers say advance tax outflows and capital gains-related adjustments will weigh on the markets in the near term.
Fund managers are keeping cash in hand amid strong inflows and elevated valuations in the small and midcap space. Stress data shows that nearly half of the schemes in the smallcap space are holding cash of 5 per cent or more at the end of February 2024. By comparison, only 20 per cent of the midcap schemes had over 5 per cent cash in their portfolio during the same period.
The country's six largest smallcap schemes would require more than 20 days to liquidate half of their holdings, despite most of them maintaining high cash levels and having considerable exposure to more liquid largecap stocks, stress tests conducted by fund houses reveal. For midcap funds, the time required to sell half of the assets of the top six schemes varies between seven and 34 days, according to disclosures made by asset management companies. The Securities and Exchange Board of India (Sebi) had called for such tests in the face of strong inflows into smallcap and midcap funds, despite concerns over high valuations, to keep investors better informed.
Actively managed midcap and smallcap schemes that have struggled to beat the benchmark indices in the past year have managed to outperform the indices during the downturn phase. Barring a few schemes, all active funds in the two categories have managed to arrest the decline vis-a-vis the key benchmarks.
Before framing regulations to curb 'misleading' messages and stock recommendations by finfluencers (a portmanteau of the phrase 'financial influencers'), the market regulator plans to put in place some 'building blocks' to ensure smooth enforcement. Madhabi Puri Buch, chairperson of Securities and Exchange Board of India (Sebi), is of the view that the 'traditional approach may not work' to rein in finfluencers. "There are many interlinked pieces in our regulations - investment advisor regulations, research analyst regulations, the fact that we don't have algorithmic (algo)-related regulations, what brokers are permitted to do, and what is incidental advice.
The Indian equity market clocked record average daily turnover (ADTV) in both the cash and derivatives segments in February amid a spike in volatility. The ADTV for the cash segment for both the exchanges combined came at Rs 1.27 trillion, while the same for the derivatives or the futures and options (F&O) segment stood at Rs 483 trillion in the previous month. The volumes for both cash and derivatives have almost doubled from a year ago on the back of rising retail participation in the world's fourth largest equity market.
Madhabi Puri Buch, the first female chairperson of Sebi, doesn't plan to rest on her laurels in her third and final year in office and has set out an ambitious goal, such as moving towards a same-day and instantaneous settlement cycle for the secondary market.
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