India’s market-cap categories under scrutiny as mid-cap churn and small IPOs rise

# Why India's market-cap definitions are being questioned

What's causing the debate

Market participants point out that India's listed market is larger than before, but the classification still fixes the large-cap universe at precisely 100 stocks. A senior market figure argues that size thresholds tied to market capitalisation would be a more logical way to define categories than an arbitrary stock count.

At the same time, the mid-cap segment shows high churn. Kotak Institutional Equities data for FY22 to the first half of FY27 found only 46 stocks remained common in the Nifty Midcap 150 across five years. In that period, 275 unique stocks either entered or exited the index, and each six-month rebalancing typically added or dropped 13–18 names. That level of turnover makes historical comparisons of index returns and valuation metrics less reliable.

Why churn matters for investors

Index turnover also complicates the work of active managers who measure performance against benchmarks and design strategies around peer groups. If the composition shifts repeatedly due to market narratives or short-term thematic flows rather than long-term fundamentals, comparisons across time become misleading.

Proposals on the table

Practitioners put forward two main corrective ideas:

• Replace fixed-number buckets with market-cap thresholds. This would align category membership with company size instead of rank order alone.
• Add more granular categories below the current small-cap label. Market veteran Arun Kejriwal recommends introducing micro-cap and mini micro-cap groups and expanding the large-cap universe. He notes that some companies with market caps near ₹40,000 crore are currently classed as small-cap solely because they sit outside the top 250.

Those changes aim to give investors and mutual funds clearer, size-aligned choices across the capital structure and reduce the funneling of institutional capital into a narrow set of stocks.

Broader consequences

If classifications remain unchanged, industry participants warn the growth of pool size in domestic mutual funds and rising retail participation will continue channeling money into a limited stock universe. An updated framework could broaden the institutional investmentable universe and better reflect the diversity created by a busy IPO market where many issues are small.

Regulatory and index-provider responses will determine next steps. The debate is now part of a larger discussion about whether benchmarks, index construction and fund categorisation rules should evolve to reflect the deeper and wider Indian equity market.