SEBI's new norm & its impact expected on Nifty 50

Hello Readers,

Nifty has posted a bearish engulfing. This coincides with the big announcement by SEBI to establish minimum investment requirements in each market cap category- large-cap, mid-cap and small-cap. This decision, while disruptive of the natural market forces of demand and supply is a gift for the small-cap investors. You might have noticed several small-cap indices have given a marvellous run-up today, refer to the snapshot below-

This is however not good for Nifty50 as it comprises of the largest 50 stocks in the market. 

Now, if you have Rs.10000 (100%), in the following denominations:

Rs. 2500 in a promise coupon from your Mother that she will pay you this money on so-and-so date (debt) (25%)

Rs. 6000 in 6 notes of 1000 denomination notes (large caps) (60%)

Rs. 1000 in 10 notes of Rs. 100 (mid cap) (10%)

Rs. 500 in 100 coins of Rs.5 (5%)

But SEBI is now asking you to hold this same Rs. 10000 in such a way that you have at least 25% each of large-cap, mid-cap and small-cap. 

So now, you will have to ensure that you have 

1) At least Rs. 2500 in Rs. 5 denominations, that is 5 times of Rs. 500. That's a minimum 5x rally in the small caps

2) At least Rs. 2500 in Rs. 100 denominations, up from Rs. 1000, that is a 1.5x rally. 

So this means you have 50% already allocated to mid and small caps. Now initially you were holding 60% portfolio in large caps. 60+50=110- not a realistic scenario. So you will have to unload your Large caps to accommodate the mid and small caps.  

This, when applied to the stock market, will mean a boo-boo for Nifty 50. The large-cap index is already displaying three undeniable signs of weakness as elaborated in the analysis below.

  

This move by SEBI will prove to be a big promoter for the Indian economy in general and I believe is very much in line with the Central Government's mandate of promoting small businesses as observed in the budget 2020. 

Please leave your thoughts in the comment section below. This will help me improve my content. 

Thanks for reading :)

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Kavita