Sensex on Wednesday ended 906 points to crack below the 73,000-level while Nifty also fell below 22,000 but the pain was unbearable on the other end of the market comprising smaller stocks. The smallcap index fell over 5% to record the worst single-day fall since December 2022, midcaps lost 4% while microcaps and SME stock indices fell around 6% each as the stellar rally in the broader market is seen taking a pause.

The market capitalisation of all BSE-listed stocks fell by Rs 14 lakh crore to Rs 372 lakh crore.

The excessive valuations in the smallcap segment, driven by the irrational exuberance of retail investors, has been a concern for many months now, said Dr V K Vijayakumar of Geojit Financial Services.

Also Read: Adani Group stocks plunge up to 13% amid market rout

The impact of the sell-off was felt across sectors. The auto index fell about 3%, PSU bank 4%, realty and oil and gas 5% and pharma 2%. Nifty Bank also lost over 300 points. A 4% rally in ITC shares following BAT’s stake sale meant that Nifty FMCG index ended flat.

Today’s downside defies the global trade setup as the S&P500 had hit a record high overnight. FIIs have also started buying Indian stocks and have invested $3 billion so far in the month. The problem, therefore, is more domestic in nature.Here are key factors behind the fall in Sensex, Nifty and smallcaps:

1) Sebi stress test
After asking mutual funds last month to put in place a system to protect the interest of smallcap and midcap investors over concerns over froth building up in pockets of the market, Sebi chairperson Madhabi Puri Buch has now put out a tough message.

“There are pockets of froth in the market. Some people call it a bubble, some may call it froth. It may not be appropriate to allow that froth to keep building,” Buch told reporters on Monday.

Following Sebi’s nudge, ICICI Prudential Mutual Fund has temporarily suspended fresh subscriptions via lumpsum mode to smallcap and midcap funds. This, analysts, say also indicate the excessive valuations in the broader market.

2) Valuations
While some of the top brokerages and veteran investors have been warning against the unsustainable valuation in the smallcap space, Buch’s words that valuation parameters are off the charts and not backed by fundamentals leading to “irrational exuberance” seem to have done the trick.

Other than the premium valuation no fundamental issue is noticed to drawback the long-term growth image of domestic midcaps, said Vinod Nair of Geojit Financial Services.

3) Mahadev betting app case
The Enforcement Directorate (ED)’s investigation into the multi-crore Mahadev Online Book illegal betting app scam has found a link to the bubble in the stock market. The ED has frozen shares worth Rs 1,100 crore held in demat accounts linked to Dubai-based alleged hawala operator Hari Shankar Tibrewala.

Tibrewala and his entities held stakes in more than 30 listed stocks like Sigachi Industries, Gensol Engineering, Vikas EcoTech, Toyam Sports, LKP Finance, etc. Shares of most of these stocks have been on a downward spiral since the ED action.

4) Leverage cut
Stock brokers have begun to ask traders to liquidate their leveraged bets in mid and smallcaps amid the sell-off in recent days following Sebi’s warning.

Brokers said the comments have prompted them to ask clients to cut their stock positions built on loans, especially ahead of the financial year end on March 31, ET reported.

5) Profit booking and loss harvesting
With just 2-3 weeks left for FY24 to end, investors are reshuffling their portfolios as part of adjustments for tax purposes. Loss harvesting also typically happen during March.

6) Technicals
In Tuesday’s session, Nifty formed a long-legged Doji candle but failed to negate the bearish evening star pattern in the previous session. On the derivatives front, bearish sentiments were seen yesterday as majority of the sectors either witnessed short build up or long unwinding.


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