MUMBAI: Given the rising mismatch between demand and supply of debt market instruments across investor classes, a senior Sebi official has urged the mutual fund industry and its lobby Amfi to conduct voluntary and credible industry-wide stress tests.
Reeling out numbers to buttress his points, Sebi whole-time member Ananth Narayan G told mutual fund industry leaders in New Delhi that in FY24 alone, net demand for paper — across primary and secondary markets — from all MFs, DIIs, FPIs and individuals stood at around Rs 3.6 trillion. As against this, Narayan said the supply of fresh paper in FY24 — across IPOs, FPOs, rights issues, QIPs and preferential allotments — was less than Rs 2 trillion and the mismatch has been growing much faster in recent times.
“Of course, for every buyer there must be a seller. But ideally, one would like to see fresh paper issued by companies, rather than substantially the same paper being churned, to meet the demand for paper from core investors such as individuals, MFs, DIIs and FPIs,” he said.
“Fresh paper issuance is clearly a better reflection of fresh capital formation and raises less doubts about asset price inflation. Over the past five years, over 40 percent of all midcap, smallcap and microcap stocks have grown by over 5x in price. While earnings growth, macros and any other number of factors can be used to explain and justify price movements, I would urge industry experts, who are the fiduciary managers of public money, to collectively deliberate on this issue,” Narayan said in a speech shared by Sebi on its website on Friday evening.
He further said, “As a result of the large inflows from individual investors into equity capital markets in recent times, the holdings of MFs, DIIs and individuals have risen from 54.3 percent of the free float of all midcap and smallcap companies as of March 2020 to 60.6 percent as of March 2024. This does raise questions about what would happen in the hypothetical stress event of large redemptions from mutual funds, particularly from arguably less-liquid midcap and smallcap schemes.”
H said that from under 2 crore unique investors as of March 2019, the MF industry has increased to nearly 4.7 crore unique investors as of June 2024, an annual growth of 18 percent each year. Since March 2019, MFs have net garnered, on average, nearly Rs 2.4 trillion each year. Of this, over Rs 2.2 trillion was directed towards risk-oriented schemes such as equity-oriented schemes, hybrid schemes, equity-oriented exchange traded funds and index funds.