Large FII Holding Leaves Midcaps with Little Cover When They Exit Stocks like Gitanjali Gems Gemini Comm, Tulip Tele crashed up to 60% in June

Indian mid-cap companies with high foreign ownership are seen at greater risk in the event of a big sell-off in equity markets, say money managers. Some mid-cap companies such as Gitanjali Gems, Gemini Communications, Tulip Telecom and others have already crashed up to 60% in June, when FIIs sold equities worth . 12,000 crore, their biggest monthly sell-off in nearly five years post the Lehman crisis. Typically, foreign investors, as part of their investment strategy, tend to walk out of less compelling corporate stories, especially when there's a perception of risk. Also, in a falling market, there are often no takers for mid-cap companies, making them extremely vulnerable. 

"The share of mid-caps in foreign institutional investors' overall portfolio is not very significant. But when foreign institutions decide to take money off the table, they first sell the mid-caps from their portfolio," said Deven Choksey, managing director at KR Choksey Securities. "Domestic institutional investors have gone missing from the Street, thus whenever there's big selling in midcaps, there's no support for the stocks." 
Analysts say investors are usually sceptical about investing in mid-caps due to poor corporate governance, with very little financial and operational information forthcoming. "Investors shy away from mid-caps as the research coverage for most of the companies is not readily available. It becomes difficult for investors to take informed decisions on midcaps even if they are found at attractive valuations," said Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance. "Mid-caps are illiquid in nature, thus there are no buyers for them in falling markets," Pradhan said. 
Mid-caps are generally high-beta stocks — when the market goes up, they move more than the market; when it crashes, they lose more than the market. "Foreign investors have concentrated holdings in mid-caps, and only a few of them invest in mid-caps. So, when they sell, it creates panic in the stock behavior," said Upendra Kulkarni, executive director, with Fortress Financial Services. "The quality of mid-cap companies is important. When markets have a free-fall, poor quality mid-caps get hammered," he said. Another reason for the mid-cap crash is that many promoters have pledged their shares with institutions for funding needs.