Sebi’s new rules should benefit small and mid caps


A Sebi circular requires multicap funds to invest at least 25% of each of their assets in the large, medium and small cap segment. This has led to the apprehension of the forced buying of mid and small cap companies at high prices. Mint takes a look.

What happens with multicap funds?

On September 11, the market regulator, the Securities and Exchange Board of India (Sebi), issued a circular amending the structure of multicap funds. According to this circular, multicap funds should invest at least 25% of their assets each in large, medium and small capitalization companies. The problem is that this standard is more restrictive than the existing rules, which allow the fund manager to decide the allocation between these segments. On average, these funds invest around 70% of their assets in large caps, 22% in mid caps and 8% in small caps, according to data compiled by Value Research.

Why did Sebi publish such a circular?

According to a clarification subsequently released by the markets regulator, the circular was issued to make multicap systems more faithful to their label and reduce bias towards larger companies. Sebi also stressed that these systems should also be compared to appropriate benchmarks. For example, if a fund invests at least 80% of its assets in large-cap companies, it can be compared to Sensex or Nifty. According to the market regulator, some multicap systems invested up to 80% of their assets in large caps, and almost nothing in small cap companies.

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Regulatory overhaul

What will be the likely impact of the Sebi circular?

According to the new standards, approximately 30,000 crore is expected to move from large cap stocks to mid and small cap stocks. Small and mid caps have already seen their prices jump in a market rebound since March 23. The mere expectation of fund purchases can drive these stocks even higher and entice fund investors to engage in expensive mid and small cap companies.

How is the industry reacting to this?

Fund managers say investors may be asked to switch to another system from the same fund house, the systems could also be merged with large-cap systems from the same fund house, or the status of the system could. be changed to a category such as “ large and mid-cap ” which benefit from more flexibility than multicap funds. Sebi also indicated that MFs could adopt such routes. The industry may also request an easing of the deadline for complying with the circular, which is currently within one month after Amfi publishes a list of fund categories in January 2021.

What can investors do in such a situation?

Experts suggested a “policy of waiting and monitoring.” If multicap funds move into a category that allows them to keep their division large and small, investors may not be affected by the new standards. If the plans do not make such a change, investors should look at the aggregate exposure to mid and small cap companies. If the move from multicap funds to these companies pushes this exposure above the limits, investors may wish to exit. If there is a forced purchase of such companies by multicap funds at inflated prices, investors may consider buying back.

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