Whalesbook
Motilal Oswal Asset Management Company (AMC) announced the immediate discontinuation of subscriptions for its Motilal Oswal Nifty Microcap 250 Index Fund, effective January 8, 2026. This decision, made in consultation with the Securities and Exchange Board of India (SEBI), has ignited debate within the investment community.
Regulatory Hurdles
The fund house stated that subscriptions, including fresh and additional purchases via lump sum, switch-ins, and new Systematic Investment Plans (SIPs) or Systematic Transfer Plans (STPs), will cease. Existing SIPs/STPs will be paused, and any received subscriptions post the cut-off time will be refunded without interest. This effectively halts all new investments into the scheme.
The Classification Conundrum
While the precise reasons were not explicitly detailed by the fund house, industry speculation points to perceived liquidity concerns and, more critically, compliance with SEBI's current classification norms. SEBI does not currently define 'micro-cap' as a distinct market capitalization category.
Pratik Oswal, Head of ETFs and Index Funds at Motilal Oswal, clarified that the issue is "purely around compliance with existing classification norms, and nothing else." He noted that current micro-caps are larger and more liquid than small-caps were historically, and the fund could manage assets substantially larger than its current ₹2,600 crore AUM without liquidity issues. Existing investors are not impacted, and a resolution is being actively pursued.
Rethinking Market Cap Segments
Data indicates that the time needed to liquidate 50% of the fund's portfolio is only two days as of December 31, 2025, suggesting liquidity is not a practical constraint. However, the rapid growth of Indian markets necessitates a re-evaluation of market capitalization segmentation. Current SEBI definitions place the top 100 companies as large-cap, 101-250 as mid-cap, and beyond 250 as small-cap. Micro-cap generally refers to the lower end of small-cap stocks.
The market capitalization of small-cap stocks has surged from approximately ₹2,000 crore five years ago to ₹12,000 crore today. This expansion highlights the inadequacy of the existing four-tier structure.
The Path Forward
The Association of Mutual Funds in India (AMFI) and SEBI are reportedly working on revamping categorization norms, with changes expected soon. Experts suggest SEBI could introduce new slabs like 'mini mid-cap', 'mini small-cap', 'micro-cap', and 'tiny-caps' to better reflect market realities.
For schemes investing in very small companies, SEBI could consider mandates requiring a three-year lock-in period to address potential liquidity concerns. Fund managers should also be granted flexibility in portfolio construction. SEBI Chairperson Tuhin Kanta Pandey has previously advised AMCs investing in micro-cap companies to maintain proper documentation for transparency and due diligence, a caution that fund houses should heed.