SEBI Directive Triggers Stock Market Plunge: Sensex Dips Over 800 Points

In a volatile day for the stock market, the Sensex witnessed a sharp decline of over 800 points, and the Nifty slid by 1%, losing its hold on the 22,000 benchmark. The downturn in indices tracking small, midcap, and microcap stocks, experiencing a decline exceeding 2%, was attributed to a recent directive from the Securities and Exchanges Board of India (SEBI).

SEBI’s Directive on Small-Cap Schemes: The SEBI directive, communicated to the Association of Mutual Funds in India (AMFI), focuses on safeguarding investor interests in smaller-cap schemes. Citing concerns over excessive speculation in smaller market segments amid sustained investments in small and midcap mutual fund schemes, SEBI instructed mutual funds to establish policies in collaboration with Unitholder Protection Committees of Asset Management Companies (AMCs).

Implementation of Investor Protection Measures: Trustees are urged to work with Unitholder Protection Committees to formulate policies ensuring investor protection. AMCs are expected to adopt timely and effective strategies, potentially controlling new investments and adjusting portfolios. The directive emphasizes the need to counter undue benefits for early redeemers. SEBI has mandated the public endorsement of these policies on the websites of AMCs within three weeks.

Impact on Market Dynamics: The directive is anticipated to slow down the influx of funds into the broader market. Over the past year, smaller stocks have led the rally on Dalal Street, pushing the market capitalization of all BSE-listed companies towards the $5 trillion milestone. Notably, the Nifty Microcap 250 index has nearly doubled in value in the past year, with other small-cap indices posting significant gains.

Caution from Value Investors: Value investors have raised concerns about excessive enthusiasm in smaller stocks. The rally has been driven by retail investors placing direct bets on small-caps without adequate evaluation of financial metrics, as well as through small-cap mutual funds.

Investors are advised to closely monitor market developments and adjust their strategies in response to the evolving landscape.

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