Mid and small-cap shares bounced off the day’s lows following the BSE’s clarification on the price band circular, but the widely held view in the market is that most of the second-line stocks, in general, may struggle to surpass their recent highs.

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The broader market has been under pressure over the last week, as investors are beginning to get nervous about high—and in many cases, absurd—valuations.

Many stocks have come under pressure despite robust first-quarter numbers, indicating that investors have already discounted strong earnings.

Also Read | BSE clarifies on price band circular; midcaps, small caps trim losses

The other reason for the weakness in second-line shares is the ongoing boom in the initial public offering (IPO) market. With most recent listings debuting at a significant premium to issue price, the appetite for IPO—especially among retail investors—has gotten huge. To subscribe to the IPOs, investors are taking some money out of their profitable positions, particularly in mid and small-cap stocks.

Nearly 80 companies have gone public so far in 2021, compared to 51 companies in 2019 and 2020 combined. And plenty more are waiting in the pipeline. Such is the frenzy in the IPO market that a company like Chemplast Sanmar that had delisted in 2012 is now asking for a valuation four times what it had paid to minority shareholders while buying them out.

Midcaps and small caps have had a fantastic run over the last year, and penny stocks even more so. Naturally, regulators are getting into the act, lest things spiral out of control.

BSE may have clarified that it is training its guns on the dubious stocks for now (those that have risen more than 6 times in six months or 12 times in one year!). But in doing so, the bourse may have signaled that it may not be averse to similar curbs on better known mid and small caps if stock prices continue to rise unchecked.

Also Read | Explained: How a BSE circular bruised mid and small-caps

The rise and fall in mid and small-cap stocks are swift, because of low liquidity, as compared to large-cap stocks.

On the way up, the rise is exaggerated because there is not enough supply to meet demand. On the way down, the fall is steep because there are more shares than what the market can absorb.

Already, many investors are getting restless, having gotten used to seeing prices rising one way for the last many months. There is no panic for now, but if prices were to crack another 10 percent from current levels, it could most likely trigger a stampede to safety.

(Edited by : Ajay Vaishnav)