46 stocks, 275 entrants: Why India’s market-cap definitions face a rethink

India's rapidly growing equity market is sparking a debate over the relevance of the country's current stock and mutual fund classification framework. The top 100 listed companies are classified as large-caps, the next 150 as mid-caps, and all firms ranked below 250 are considered small-caps. However, industry experts argue that this system has outlived its usefulness as the market capitalization has expanded.

Sanjeev Prasad, Co-Head and Managing Director at Kotak Institutional Equities, contends that only 100 stocks can be labeled as large-caps despite the significant increase in market capitalization. He advocates for defining market classification based on size rather than the number of stocks. Furthermore, he highlights the high level of turnover within benchmark indices, noting that only 46 stocks have consistently been part of the Nifty Midcap 150 Index over the past five years, despite 275 new entrants and exits between FY22 and the first half of FY27.

This rapid turnover complicates historical comparisons of returns, valuations, and earnings growth, as many of the same stocks are not being compared over time. Mahavir Lunawat, Managing Director of Pantomath Group, believes the classification framework itself needs a comprehensive overhaul. He points out that companies with market capitalizations around Rs 40,000 crore are still classified as small-caps simply because they fall outside the top 250 stocks by market value.

This rigid classification is said to be channeling institutional money into a limited set of stocks, despite the significant expansion of India's listed market. Market veteran Arun Kejriwal has gone further, proposing the introduction of new categories such as micro cap and mini micro cap. He argues that the current three-tier structure fails to capture the breadth of India's equity market, especially with the rise in smaller IPOs.

Kejriwal suggests that investors and mutual funds would benefit from having the flexibility to allocate capital across a wider spectrum of listed companies. He calls for a review of the upper end of the classification spectrum, arguing that the large-cap universe should be expanded as India's listed market continues to grow. The debate, therefore, extends beyond mere terminology and has broader implications for the allocation of institutional investment across the Indian equity market.