Sebi’s new rules likely to benefit small, mid caps

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

What is happening with multicap funds?

On 11 September, the markets regulator Securities and Exchange Board of India (Sebi) rolled out a circular altering the structure of multicap funds. According to this circular, multicap funds would have to invest at least 25% of their assets each in large-cap, mid-cap and small-cap companies. The issue is that this norm is more restrictive than the existing rules, which allow the fund manager to decide the split between these segments. On an average, such 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 issue such a circular?

According to a clarification subsequently issued by the markets regulator, the circular was issued to make multicap schemes more true to their label and reduce the skew towards large companies. Sebi also pointed out that such schemes must also be compared to appropriate benchmarks. For instance, if a fund invests at least 80% of its assets in large cap companies, it can be benchmarked against the Sensex or the Nifty. According to the markets regulator, some multicap schemes were investing up to 80% of their assets in large caps, and hardly anything to small cap companies.

What will be the likely impact of Sebi circular?

As per the new norms, around ₹30,000 crore would have to flow from large-cap stocks to mid- and small-cap stocks. Small and mid-cap companies have already seen their prices surge in a market rebound since 23 March. The mere expectation of fund purchases can further drive up such stocks and saddle the fund’s investors with expensive mid- and small-cap companies.

How is the industry responding to this?

Fund managers say investors can be asked to switch to another scheme of the same fund house, schemes could also be merged with large cap schemes of the same fund house or the scheme’s status could be changed to a category like ‘large and midcap’ which enjoy more flexibility as multicap funds. Sebi also indicated that MFs could adopt such routes. The industry may also seek relaxation of the time limit to comply with the circular, which at present is within a month of Amfi publishing a list of fund categories in January 2021.

What can the investors do in such a situation?

Experts have suggested a ‘wait and watch policy’. If multicap funds are switching to a category that allows them to retain their large and small split, investors may not be adversely hit by the new norms. If the schemes do not make such a change, investors should look at the overall exposure to mid- and small-cap companies. If the shift in multicap funds towards such firms pushes this exposure above limits, investors may wish to exit. If there is forced buying of such firms by multicap funds at inflated prices, investors may consider redeeming.