Foreign investors brave smallcap corrections, raise stakes in March quarter

So far in April, BSE Smallcap index rose nearly 7.7 percent while Nifty gained just 0.2 percent.

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26 Aug, 2025 12:21

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Smallcap firms saw correction in their stock prices since the beginning of 2024 as regulatory warnings of froth and analyst concern over valuation poured in. Foreign investors, however, raised their stakes in almost 60 percent of firms on the BSE SmallCap index in the March quarter, compared to the previous quarter. Out of 1,000 BSE SmallCap index stocks, 596 saw a rise in FII holding, 384 recorded a reduction, while there no change in 18 stocks.

FII stakes surged in Suzlon Energy with a notable increase of 23 crore shares in the March quarter, followed by Reliance Power and Vikas Lifecare. Suzlon Energy saw a rise from 231 crore shares to 254 crore shares, Reliance Power from 31.89 crore to 52.27 crore shares, and Vikas Lifecare from 2.46 lakh shares to 18 crore shares. Other firms witnessing significant FII stake hikes include South Indian Bank, Allcargo Logistics, Rattan India Power, JP Power Venture, Genus Power Infra, Paisalo Digital, Bank of Maharashtra, Lemon Tree, and Infibeam Avenues.

"Investors in smallcap stocks look to earn alpha and compound returns and to spot stocks that can become mid- and large-cap stocks over medium or long term. Warnings from the regulator led to some correction in the space (in terms of time and value). However, investors who have taken exposure to such stocks after sufficient due diligence and getting convinced did not get shaken up and, in fact, may have added to their positions in the fall," said Deepak Jasani, head of retail research at HDFC Securities.

In February, the BSE SmallCap index dropped by 1.15 percent, followed by a 4.55 percent decline in March. This was influenced by various factors, including ED raids on a major market operator and associated entities, Sebi's concerns about market 'froth', and warnings to mutual fund trustees regarding small and midcap segment investments. Additionally, fears of mutual fund unwinding to improve liquidity stress test results and concerns about the RBI intervention added to market apprehension.

So far in April, the BSE SmallCap index rose nearly 7.7 percent, while Nifty gained just 0.2 percent. Analysts said small-cap space may outperform the Nifty for some more time before mean reverting. The robust economic growth leads to emergence of niche small players who have undergone pain in scaling up and now are set to increase their pace of growth.

However, investors need to be vigilant and conduct enough due diligence before taking exposure at these levels and not invest based on hearsay or tips. Also partial profit-booking may be advised in some stocks so that cash can be raised for deployment in other stocks or to build cash to deploy in times of market weakness, they added.

Several other firms too attracted FII interest with increasing stakes, including Indiabulls Housing Finance, JP Associates, Manappuram Finance, IDFC, CMS Info Systems, NCC, HCC, Aptus Value Housing Finance, NLC India, HUDCO, Electrosteel Casting, J&K Bank, CESE, SpiceJet, Samhi Hotels, Easy Trip Planners, Hindustan Copper, Bajaj Hindustan Sugar, EIH, Pricol, NMDC Steel, and Redington.

Vinit Sambre, head-equities at DSP Mutual Fund, said each FII operates under its unique mandate, leading to diverse behaviors and objectives. In the Indian equity markets, FIIs are increasingly investing in mid and small-cap companies, drawn by their historical outperformance compared to large caps. Long-only FIIs with extended horizons are now exploring these segments beyond the MSCI India index, recognising India's broad-based growth potential.

The limitations of large-caps push investors towards mid and small caps, where significant players in sectors like agriculture, dairy, and building materials reside. Despite concerns about valuations, FIIs view corrections in smallcap and midcap stocks as opportunities to enter quality companies at lower levels. Sentimental impacts from Sebi disclosure norm changes further contributed to price corrections in January, February, and March, presenting attractive entry points for FIIs seeking long-term growth amid global economic slowdowns, particularly in China, he added.

"India is the fastest-growing country with supportive macro data points and healthy corporate earnings. The government's focus on infrastructure development and making India a manufacturing hub will drive growth for next few years. All these make India an attractive investment destination from long term perspective and FIIs can't ignore that. Smallcaps tend to grow faster vs large-caps in fast growth environment and recent correction offered investors with good entry points into them," said Sneha Poddar, associate vice president at Motilal Oswal Financial Services.

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