Sebi’s directive to AMFI to protect investors in small, midcaps timely and appropriate, say experts

The broader market, or mid- and small-cap indices, was trading with significant cuts on Thursday, February 29, after the capital markets regulator, Securities and Exchange Board of India (Sebi), on Wednesday asked the Association of Mutual Funds in India (AMFI) to set up a framework for protecting investors in small and midcaps amid frothy valuations. It was the second consecutive day of decline in the second-rung stocks.

AMFI, as per a report by Reuters, asked members to moderate inflows into small and mid-cap funds and protect investors from large outflows after strong inflows raised concerns of a potential crash. The industry requested in a letter dated February 27.

The directive comes following a communication from the market regulator Sebi, which has also asked fund houses to provide more information about the risks associated with such funds. The fund houses have been given 21 days to comply.

Chokkalingam, Founder, of Equinomics Research, opined that it is a good move by Sebi and is in the interest of retail investors, especially when over six crore new investors entered the capital markets in the last two to three years.

“I believe most of these new investors get carried away by momentum in micro and small-cap stocks, as most of them haven’t seen cycles of burst in micro and small-cap stocks. This kind of measure will go a long way in relatively protecting retail investors’ wealth and also consistently growing the investor base in the country," the expert added.

The expansion of the investor base and flow of capital into stock markets would ultimately help in resource mobilisation for corporate and economic growth. Hence, these measures are very much needed, the expert added.

Echoing a similar view, Sudip Bandyopadhyay, Group Chairman, Inditrade JRG Group, said the move by Sebi is very timely and appropriate considering the massive amount of data they possess on the flows in the market. Additionally, they are in the best position to sound alarm bells on time.