Wednesday saw a severe beating for smallcap equities, with the benchmark BSE Smallcap index falling more than 4% and burning a hole in the wallets of ordinary investors. 1,050 stocks, primarily small- and mid-cap companies, reached their lower circuit limitations on the BSE due to the intense selling frenzy. A few big mutual fund institutions announced a halt to lump sum distributions, while Sebi warned of valuation froth in the midcap and smallcap space. 

KIOCL, one of the components of the BSE SmallCap 250 index, had reached its lower circuit limit by 10% at Rs 372.30. The circuit limits of IRB Infrastructure Developers Ltd. and HUDCO were locked at ten percent. Other companies that hit their five percent lower circuit limitations were Tata Investment Corporation Ltd., HUDCO, MMTC, Network 18, TV18 Broadcast, SPARC, and NBCC.

The required disclosure format for mutual funds, which Sebi shared to examine the stress situation in the funds, will be released by March 15th, adding to the already-existing concerns. Analysts observed that this is contributing to the smallcap selloff.

The S&P BSE SmallCap index crashed by 2,073.10 points, or 4.84 percent, intraday on Wednesday, reaching 40,758.19. The majority of the index's decline was caused by smallcap firms like Phoenix Mills, Suzlon Energy, Jindal Stainless, Nalco, Prestige Estates, RVNL, and NCC.

The index had dropped 13% from its record high of 46,821.39 set last month to a low of 40,734.77.

The NSE's ASM long-term framework covered a lengthy list of 240 shares, the majority of which were small and midcap firms. The exchange's short-term ASM framework covered about 33 additional stocks. Sebi has been implementing a number of improved preemptive surveillance techniques in an effort to protect retail investors' interests and improve market integrity. Securities under ASM are only shortlisted based on market surveillance.

"Excessive liquidity drove up midcap and smallcap stock prices, often exceeding their justified values based on earnings. The surge in funds flowing into these segments compelled fund managers to invest, further inflating valuations. Authorities have acknowledged the situation and proposed potential regulations. Given the historical volatility of small and midcap stocks, it's crucial for investors to exercise caution in allocating funds, whether directly in stocks or through mutual fund SIPs," said Gaurang Shah, Senior Vice President, Geojit Financial Services.

Market guru Shyam Sekhar summarized the current worries about the market in a post on X on March 8: "Most of the returns in smallcap funds is essentially beer froth. Impact cost is what people seem to mistake for returns. Continuously buying the same set of shares has raised all boats. It has little to do now with fundamentals. Now, a selling spree can teach a lot of one trick ponies real investing. The trigger has been pressed," he said.