Prior studies document the evidence of size effect in India. Mohanty (2002) for example, documents that during the sample period 1991-2000, the small-sized companies have generated an annualized excess return of more than 60% over the large stocks. Since it is a well-known fact that the transaction costs of the small-sized companies are much higher than those of the large companies, Indian stocks market can however be termed inefficient only if one can actually earn this excess return after adjustment of the transaction costs. In this paper we find that though the transaction costs of the small-sized companies are much higher compared to those of the large companies, the return differential still persists even after adjustment of the transaction costs.