Over the last few days stocks in the midcap and smallcap sector have been beaten down mercilessly. A number of theories have been propounded on what happened and why this meltdown. There are two issues where one the promoter pledges his shares with lenders which could include banks and financial institutions and also private financers. The second issue is that so called market intermediaries popularly known as ‘operators’ have large positions in some shares. These people also use finance and leverage their positions through loans from brokers and NBFC’s. At times the same share has loans taken by a promoter and also taken by the so called operator. When there is a fall in price it triggers a cascading effect as margin calls from the leveraged investor/operator get triggered and also cause selling from institutions whohold under lien pledged shares of the promoter.
What happened in recent days was unwinding due to selling of a number of shares of leveraged operators who had lines of credit from multiple brokers. When one of them started liquidating a number of stocks it led to a chain of selling and one after the other selling led to circuits on the downside. One broker after another began selling and stock after stock started hitting down circuit. The panic was accentuated by the electronic media and the two issues of pledged shares and operator funding got linked and for all practical purposes became the same.
It may be mentioned that many of these so called shares which have been casualties of this midcap smallcap madness have valuations which look stretched even after this meltdown. The meltdown saw stocks fall between 50% -75%. Some of these stocks include Core Education, AanjaneyaLifecare, Sudar Industries, Lovable Lingerie, Rushil Décor,Timbor Home,Onelife Capital, PG Electroplast and Syncom Healthcare. This list is by no means complete and is just a representative list to give readers a flavour.
Many of these shares have had a chequered past and have fundamentals which do not support their market capitalisation. It is best to simply avoid these stocks as dabbling in them will not only be injurious to your wealth but could also lead to some unpleasant action being taken against investors. It may be mentioned that the pay out of funds and securities was withheld in four securities which were at the receiving end on Monday the 25th of February 2013 and were not made on the 27th of February when the normal pay out should have happened. Sellers and brokers who sold these shares were called for questioning by the regulator and the final outcome or final word on the matter is not yet out.
The madness of midcap and smallcap is nothing new and while these stocks have a tendency to outperform the markets they also leave big holes in your pockets. Invest cautiously.
