BSE SmallCap

What is the BSE Smallcap?

The BSE Smallcap is a stock market index managed by the Bombay Stock Exchange (BSE) that serves as a benchmark for the performance of small-cap companies listed on the BSE. Small-cap companies are generally defined as those with a relatively smaller market capitalisation compared to their large-cap and mid-cap counterparts. The BSE Smallcap index provides investors, analysts and fund managers with a comprehensive representation of the smaller segment of the Indian equity market.

This index is designed to track the movement and overall performance of companies that fall below the threshold used for inclusion in the BSE 100 and BSE Midcap indices. Typically, these are companies with a market capitalisation lower than the top 250 listed entities. The BSE Smallcap index is market capitalisation-weighted, meaning that companies with a higher market cap have a greater influence on the index’s movement, but all constituent stocks are from the small-cap universe.

Small-cap stocks are known for their potential for higher growth compared to larger, established companies, but they also come with higher volatility and risk. The BSE Smallcap index helps investors gauge the sentiment, trends, and investment opportunities within this dynamic segment. It is widely used as a performance benchmark for small-cap mutual funds and investment portfolios, allowing stakeholders to compare their returns with the overall market performance of small-cap companies. Thus, the BSE Smallcap plays a crucial role in fostering broader participation and transparency in the Indian equity markets.

When was the BSE Smallcap introduced?

The BSE Smallcap index was officially introduced by the Bombay Stock Exchange (BSE) on April 1, 2005. Its launch was part of BSE’s broader initiative to provide comprehensive coverage and representation of all segments of the Indian equity market, including large-cap, mid-cap, and small-cap companies. Before the introduction of the BSE Smallcap index, there was no dedicated benchmark that tracked the performance of the smaller companies listed on the exchange, which made it difficult for investors and fund managers to assess the performance and trends of this market segment.

The creation of the BSE Smallcap index was driven by the growing investor interest in small-cap stocks, which are often considered to possess high growth potential and can deliver significant returns over the long term. The index provided much-needed visibility and structure to the small-cap segment, offering a transparent and systematic way to monitor and analyse its movements. From its inception, the index has been used extensively by mutual funds, portfolio managers, and research analysts to create and evaluate investment strategies focused on small-cap companies.

The introduction of the BSE Smallcap index also contributed to better market segmentation and a more nuanced understanding of market trends among different company sizes. It enabled the development of a variety of investment products, such as index funds and exchange-traded funds (ETFs), which further democratised access to the small-cap segment for retail and institutional investors alike.

How are BSE Smallcap selected?

The selection of companies for inclusion in the BSE Smallcap index is governed by a systematic and transparent methodology established by the Bombay Stock Exchange (BSE). The primary criterion is market capitalisation, which is used to categorise companies into large-cap, mid-cap, and small-cap segments. The BSE Smallcap index comprises companies that rank below the top 250 listed entities on BSE in terms of market capitalisation. This means that once the large-cap (typically top 100) and mid-cap (typically next 150) companies are excluded, the remaining eligible stocks constitute the small-cap universe.

However, not every small-cap company automatically makes it to the BSE Smallcap index. There are additional eligibility criteria to ensure that the index remains investable and liquid. Companies must have a minimum listing history and must be actively traded on the exchange, which is assessed by their trading frequency and average daily turnover. This helps exclude illiquid stocks, shell companies, and those with inconsistent trading patterns.

The index is reviewed and rebalanced periodically - usually semi-annually - to ensure that it continues to reflect the true small-cap segment. During the review process, companies whose market capitalisation has risen or fallen significantly may be added or removed to maintain the integrity and representativeness of the index. Additionally, stocks under surveillance, suspended stocks, and those failing corporate governance norms are excluded from the index.

The BSE Smallcap index is a free-float market capitalisation-weighted index, meaning that only the shares available for public trading are considered for calculating each company’s weight in the index. This ensures that the index reflects actual market trends and is less susceptible to manipulation by promoters or large shareholders.