The abolition of the tax on long-term capital gains in the equity markets, and a reduction in the short-term capital gains tax to 10 per cent in the 2004-2005 Budget have come as a boon for small- and mid-cap stocks.
In the last seven months, since the presentation of the Budget on July 8, 2004, the share of non-index stocks in the total traded volume on the Bombay Stock Exchange and the National Stock Exchange shot up from a modest 18 per cent in July to over 53 per cent now.
Owing to the resurgent volume in non-index stocks, the share of stocks that figure in the BSE Sensex and the S&P CNX Nifty fell from a high of 82 per cent in July 2004 to 46.61 per cent in February 2005.
The share of the Sensex stocks declined from 62 per cent in July 2004 to around 40 per cent now. The share of stocks in the Nifty basket in the total traded volume also declined from 82 per cent to 49.7 per during the same period.
Foreign institutional investors were the major buyers in mid-cap stocks in the October-December quarter. The BSE 500, a major indicator of mid-cap stocks, surged 45.2 per cent since the 2004 Budget, while the Sensex and Nifty appreciated by 36 per cent.
Nearly a half of the 725 actively traded stocks appreciated by over 50 per cent. Twenty-nine per cent of these stocks appreciated between 50 and 100 per cent during the period. Among the index stocks, only Sail and Tata Steel posted gains of over 100 per cent.
The mid-cap stocks that attracted buyers were from sectors such as power, sugar, steel, telecom, cement, mining, chemicals, trading and textiles. The sectors that lost out included IT, banks and pharmaceuticals.
The share of power stocks, for example, in total traded volume, increased from around 2-3 per cent between July and October 2004 to around 5 per cent between December 2004 and January 2005.
In the six trading days in the current month, power stocks accounted for 67.3 per cent of the total traded value on the BSE and the NSE.
The share of sugar stocks surged from below 1 per cent until October 2004 to over 6 per cent in February.