- India’s bull market faces a significant threat in the form of overcapitalization, according to ace investor Shankar Sharma.
- Sharma attributes this risk to the greed of merchant bankers and operators, who encourage promoters to raise excess capital.
- He warns that stocks of companies with overcapitalized balance sheets could see a 90% drop in the next bear market.
Ace investor Shankar Sharma identifies overcapitalization as a major risk to India’s bull market, warning of a potential 90% drop in the value of overcapitalized stocks in the next bear market.
Overcapitalization: The Hidden Threat
Sharma points to overcapitalization as the single biggest threat to India’s bull market. This issue arises when promoters, driven by market optimism and persuaded by merchant bankers and operators, raise more capital than necessary. The result is balance sheets burdened with excess capital, which can lead to significant losses when the market turns bearish.
Implications for the Stock Market
According to Sharma, stocks of companies with overcapitalized balance sheets are likely to suffer the most in a bear market, potentially losing up to 90% of their value. This prediction comes at a time when India’s benchmark indices, Sensex and Nifty 50, have experienced significant volatility and a drop of over half a percent. Furthermore, the India VIX index, which measures market volatility, has surged nearly 35% in just four sessions in May, following a minimal rise in April.
Factors Behind the Market’s Fall
Analysts attribute the recent fall in the Indian stock market to several factors. These include premium valuations, selling by Foreign Institutional Investors (FII), pre-election jitters, and mixed Q4 results. The broader markets have also seen intensified selloffs, with the Nifty Midcap 100 and Nifty Smallcap 100 indices each dropping over 2%.
Conclusion
While India’s bull market faces the threat of overcapitalization, it’s crucial for investors to make informed decisions and consider the potential risks. As Sharma’s warning suggests, stocks of companies with overcapitalized balance sheets could see significant losses in a bear market. Therefore, investors should exercise caution and consult with certified experts before making any investment decisions.
