Is it time to rethink India’s market cap classifications?

As of December 2024, the minimum market capitalization to qualify as a largecap stock has risen to an impressive ₹1 trillion. This means that 100 Indian companies now boast a market cap exceeding ₹1 trillion (roughly $11.5 billion). For perspective, when Sebi first established this categorization in December 2017, the minimum threshold for a largecap was ₹29,304 crore—a 3.4x increase in just seven years!

What about non-largecaps?

To qualify as a midcap today, the minimum market capitalization requirement is ₹33,221 crore, compared to ₹8,584 crore in December 2017—a 3.9x growth in seven years. 

The trend is similar in the smallcap segment (stocks ranked 251-500) and in microcaps (stocks ranked beyond 500, although there is no formal definition for microcaps yet).

This data highlights that while Sebi’s definitions for largecaps, midcaps, and smallcaps have remained unchanged since 2017-18, the dynamics of the Indian markets have shifted dramatically, buoyed by recent bull runs.

With increasing stock market participation and a surge of capital chasing a limited number of stocks, the current boundaries—100 largecaps and 150 midcaps—are beginning to feel restrictive. Smallcaps, in contrast, have a much broader pool since all stocks beyond the 250th rank fall under this category.

Read this | Smallcap and midcap valuations are sky-high, bringing bluechips back in vogue

Given this scenario, it might be time to revisit the market cap bucketing definitions to provide more flexibility within the largecap and midcap universes.

Midcaps and Smallcaps: Rising thresholds

Several adjustments could be considered to better align these definitions with the evolving market landscape:

One potential adjustment could be expanding the thresholds for largecaps and midcaps to include more stocks. Instead of the current top 100 stocks being classified as largecaps, the threshold could be increased to the top 150. Based on current data, this would lower the largecap entry criteria to ₹65,000 crore. A side effect of this change would be the need to redefine indices like Nifty Next50 as Nifty Next100.

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Similarly, midcaps could encompass the next 200 stocks (ranks 151-350), lowering the entry threshold to ₹20,000 crore from the current ₹33,000 crore.

Another alternative could be adopting a dynamic percentile-based approach, where largecaps represent the top 70% of market cap, midcaps the next 20%, and smallcaps the remaining 10%. However, operational challenges might arise in implementing this approach.

Additionally, a separate microcap category could also be introduced. For instance:

Largecaps: Ranks 1-150

Midcaps: Ranks 151-350

Smallcaps: Ranks 351-600

Microcaps: Ranks 601 and beyond

These adjustments could provide a more nuanced framework while accommodating the rapid growth of Indian markets.

The case for caution

While these potential changes offer greater flexibility, they must be approached with caution.

Sebi’s 2018 fund categorization exercise remains robust, providing skilled fund managers with sufficient room to navigate market caps within the existing limits.

Major overhauls may not be necessary, but minor adjustments to align with evolving market cap dynamics could be warranted.

Also read | Bharat Shah: Views that midcaps are fleeting and smallcaps are destined to fizzle out are outdated

Ultimately, refining market cap classifications should aim to prevent excessive capital from chasing a limited pool of large and midcap stocks as Indian markets grow. A balanced approach will help sustain market efficiency and preserve investment opportunities across all segments.

Dev Ashish is a Sebi-registered investment advisor. and founder of Stable Investor.