SEBI regulation small and mid-cap funds: The Securities and Exchange Board of India (SEBI), has taken steps to address the surging inflows into small- and mid-cap stock mutual funds, aiming to moderate the influx of funds and reduce potential risks to the financial system, news agency Reuters reported quoting two sources familiar with the matter.

In a meeting earlier this month, SEBI urged money managers to consider limiting one-off investments from clients into small- and mid-cap funds and to reduce commissions offered for their sale, the report said.

SEBI's move underscores growing regulatory concerns over the significant inflows into Indian small- and mid-cap mutual funds and the potential implications for market stability if investors were to suddenly withdraw their investments.

Small-cap stocks in India are defined as those with market capitalisation of less than Rs 5,000 crore, while mid-cap stocks range between Rs 5,000 crore and Rs 20,000 crore. These segments are generally less liquid compared to their large-cap counterparts.

Assets managed by small-cap funds surged by 86.5 per cent to Rs 2.48 lakh crore as of end-January, while mid-cap funds jumped by 58.5 per cent to Rs 2.9 lakh crore, nearing the Rs 2.99 lakh crore managed by large-cap funds.

The move by SEBI aims to address the extraordinary exuberance observed in small- and mid-cap stocks, noted the regulatory official.

SEBI's communication to money managers is not a formal directive but is typically heeded by the industry. In response to SEBI's concerns, some asset managers have already reduced distributor commissions on small- and mid-cap funds by half.

Additionally, SEBI is encouraging fund houses to have contingency plans in place to manage large outflows. This may involve imposing temporary exit loads on investors or implementing swing pricing mechanisms to mitigate the impact of significant fund withdrawals.

These measures come amid a broader effort by SEBI and the mutual fund industry to moderate rapid asset growth and ensure investor protection. Earlier reports indicated SEBI's push for enhanced risk disclosure by small- and mid-cap funds and the Association of Mutual Funds in India (AMFI) urging fund houses to take steps to safeguard investors' interests.

(With Reuters inputs.)