In a circular issued on October 6, 2017, titled “Categorisation and Rationalization of Mutual Fund Schemes,” the Securities and Exchange Board of India (SEBI) classified all listed companies in India into largecap, midcap and smallcap, based on their market capitalisation. The main objective of doing this was to standardise the definitions of large, mid and smallcap companies to ensure uniformity across the equity mutual fund industry.
The Association of Mutual Funds in India (AMFI), in consultation with SEBI and the stock exchanges (BSE, NSE, MSEI), prepares and publishes this list bi-annually, using data available at the end of June and December. The published list is made public within 5 days of the data being compiled, and mutual funds have one month from publication to align their portfolios.
The categorisation defines largecap as companies ranked 1 to 100 by market capitalisation, midcap as companies ranked 101 to 250 and small-cap as companies ranked 251 onwards.
Rationale behind the classification
This classification was introduced by SEBI for several reasons.
- Uniform definitions: Prior to this circular, the terms large-cap, mid-cap, and small-cap were not consistently defined across fund houses. The classification provides a common benchmark.
- Clarity: SEBI wanted to ensure that when mutual funds label themselves under a certain category, their asset allocation aligns accordingly. For instance, a Multi-Cap fund should not be excessively skewed towards large-cap stocks, contrary to its label.
- Support diversification: Clear segmentation enables investors and fund managers to diversify portfolios across market-cap segments; a mix of large-cap, mid-cap, and small-cap assets is key to managing risk and potential returns.
- Improve transparency and comparability: With a common framework, comparing funds and their performance becomes easier and fairer for investors.
- Rebalancing: Since AMFI updates the rankings every six months, this gives fund houses a timely mechanism to rebalance their portfolios and ensure adherence to their categorisation.
SEBI’s move to standardise large, mid, and small-cap classifications brought much-needed clarity and discipline to the market, ensuring that both fund managers and investors operate on a common, transparent framework.
Market cap and free-float market cap
Other countries and exchanges also have categorisations based on market-cap, but the way they approach the definition of market-cap differs: essentially, free-float/float-adjusted market cap versus full market cap.
Market-cap, total market cap or market capitalisation refers to a company’s share price X the total number of shares issued by a company.
Free-float or float-adjusted market-cap refers to a company’s share price X the number of shares available for trading by the public. So free-float market capitalisation considers only publicly tradable shares, not all issued shares.
This is because certain types of holdings are excluded, since they are not freely tradable in the market. These can include promoter or founder holdings, government holdings, employee stock ownership plans (locked shares), strategic or cross-holdings by other companies and other restricted shares that cannot be sold in the open market. Only the “free float”, or shares that are actually available to buy and sell on the exchange, are counted, and locked-in shares and other restricted holdings are not considered.
Some exchanges follow the free-float methodology because it is considered a more realistic measure of liquidity: it reflects the portion of the company’s shares that actually trade, not just what exists on paper. It also ensures that index weightage are based on what investors can actually access. It can also lead to better benchmarking – indices like the S&P 500 or FTSE 100 want their constituents to be investable, and using float-adjusted market cap prevents companies with large locked-in holdings from dominating just because of their size.
How other exchanges across the world classify companies
Here’s a look at how it works in the US, the UK, and Hong Kong.
- United States (NYSE ecosystem)
The exchange itself does not publish “large/mid/small-cap” buckets. Instead, index providers set the benchmarks.
S&P Dow Jones has a different index for each category, the S&P 500, S&P MidCap 400 and SmallCap 600. Membership to these indices are rules-based (based on market-cap, liquidity, float, etc) and reviewed regularly.
The FTSE Russell creates the Russell 1000 and Russell 2000 indices by annually ranking all US stocks by float-adjusted market capitalisation. The largest 1000 (roughly are placed into the Russell 1000 and approximately the next 2000 are placed in the Russell 2000. The Russell 1000 represents large-cap US companies, while the Russell 2000 serves as a benchmark for small-cap companies. The Russell 3000 Index measures the performance of 3000 stocks and includes all large-cap, mid-cap and small-cap US equities, along with some microcap stocks, providing a comprehensive overview of the US equity market.
- United Kingdom (FTSE on the London Stock Exchange)
The FTSE UK Index Series splits the market by their free-float market capitalisation into distinct indices: the FTSE 100 (largest), FTSE 250 (next mid-caps) and FTSE SmallCap; the three together form the FTSE All-Share.
- Hong Kong (Hang Seng Composite Index family)
Hang Seng Composite Index (HSCI) uses a rules-based, float-adjusted market-cap ranking with size segments targeted based on total market value. The three size indexes are the Hang Seng Composite LargeCap Index (“HSLI”), Hang Seng Composite MidCap Index (“HSMI”) and Hang Seng Composite SmallCap Index (“HSSI”), with respective target coverage of the top 80%, the next 15% and the remaining 5% in terms of cumulative market capitalisation of the HSCI.
Do Indian smallcaps need further classification or segmentation?
SEBI/AMFI classifications (large/mid/small cap) use full market cap, and critics argue that this approach can sometimes exaggerate the “true” investable size of promoter-heavy Indian companies when compared with global peers, with stocks trading at higher valuations than their global peers. Under SEBI rules, all listed firms must maintain a minimum free float of 25%. If promoter holdings exceed 75%, companies are required to reduce them—through share sales, public offers, or other mechanisms. However, there are exceptions: newly listed IPOs and recently divested PSUs are allowed to operate with lower free floats for a limited period.
The Indian bourses have over 5000 listed companies. The largest, Reliance Industries Limited, has a market cap of well over 17 lakh crores (as per the latest data published in June 2025). The smallcap list as of June 2025 begins at 30,627 crores, while some of the smallcaps at the very bottom of the list have a market capitalisation of less than 1 crore.
The difference in market cap between the biggest largecap and the biggest smallcap is vast — but so is the difference between the top smallcap and the bottom small caps that make up the end of the list. When there is such a stark difference in company size and scale, is classifying all companies ranked 251 and below as smallcaps enough? Does there need to be a re-classification for the smaller companies in this segment?
Given the nature of how market cap works in India, it is certainly something to consider — but we’ll have to wait and watch how SEBI navigates things in the days ahead as the markets evolve.
Sources
Investopedia: Free-Float Methodology and How to Calculate Market Capitalization
Analyst Prep: Benchmark Selection
S&P Global: Methodology Matters
Prime Investor: Free Float, The X-Factor In Stock Returns
TioMarkets: S&P Midcap 400 Explained
S&P Smallcap 600: Benchmarking the Performance of Small-Sized Companies
HSI: Index Methodology for Managing the Hang Seng Composite Index Series