As the year 2023 draws to a close, India's stock market appears to be in fine fettle with the benchmark indices, the Nifty 50 and the Sensex yielding over 18 per cent gains for the year. Performance of the domestic benchmarks is superior to their peers in many other emerging markets such as China, Malaysia and Singapore, indicating that global investors consider the prospects of Indian equity superior to stocks in other EMs.

This view is not without merit, as domestic demand has recovered well from the pandemic and is helping mitigate the impact of slowing external demand. Quarterly earnings of listed companies revealed that decline in commodity prices is helping expand profit margins, though revenue growth is turning a tad sluggish. The price-earnings multiple of the large-cap Nifty 50 index is also close to its long-term average and does not appear overheated yet. That said -- while the large-cap segment, where most of foreign and domestic institutional activity is concentrated appears healthy -- there are many worrying signals emanating from the mid-and- small-cap segments. The Nifty midcap 100 index is up 45 per cent in 2023 while the Nifty small-cap 100 index is up 54 per cent. Of concern is that the top 100 stocks in these segments do not completely reveal the heightened speculation in the smaller stocks.

However, in their quest to make money, investors are now betting on stocks of companies which are consistently making losses and have eroded their net worth completely. Such companies, which were trading at rock-bottom prices have been witnessing buying interest, with prices rising manifold in just a few sessions. These stocks are typically preferred by retail investors or stockbrokers for their proprietary trades, as the low floating stock and high impact cost makes them unsuitable for larger investors. Prior to the pandemic, around 2,900 securities would trade in a session on BSE, the bourse which lists most of the penny and small-cap stocks. In December 2023, around 4,300 securities traded in each session, indicating that trading action is spreading to the long-forgotten and less-traded stocks. Around 400 securities hit a 52-week high every day this month on the BSE, against pre-pandemic average of just 61 stocks.

The regulator needs to take note of this runaway speculation and take action. Allowing such irrational stock movements to continue will encourage short-term speculative buys over long-term investment. While exchanges do move stocks witnessing excessive speculation under the graded or additional surveillance mechanism (GSM/ASM), where the margins are higher and trading made more difficult, this does not seem to be checking speculative activity. Greater awareness needs to be created by the regulator and exchanges about risks in trading in highly speculative stocks, along with publicising a list of such stocks on popular investor websites. The regulator can consider further increasing the margins in stocks under ASM and GSM for a short period till speculation is controlled.

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