When promoters increase their shareholding in a business, it is generally considered as coming of a good time for the business. SEBI (Securities and Exchange Board of India) is taking several actions like employing several proactive measures to relax fundraising norms. Hence it will give companies an option to raise capital amid the Covid-19 pandemic.
Sebi also amended the takeover norms recently by allowing promoters to increase their stake to 10 per cent from 5 per cent via. allotment of preferential share till March 2021 because of the pandemic caused by the COVID-19 and slow economic growth.
There’s no doubt; this step would help promoters raise capital. It will also provide greater flexibility in pricing preferential issues. This option will help promoters secure and bring funds into their companies effectively and efficiently with the feature of regularly accessing investments from institutional investors via QIP’s (Qualified Institutional Placements).
What Good is Expected Out of these Amended Takeover Norms?
This amendment in raising funds norms will protect companies from takeover threats. Due to COVID, the Indian stock market witnessed severe correction, creating opportunities for value buying and promoters raising stake, forcing companies, government, and investors to go for unique solutions to unique troubles.
Sebi’s latest amendment will turn out to be very crucial for the Indian Capital Market. It may help the market stabilize because of flows from promoters will tend to be more long-term than other institutional flows, thus boosting investors’ confidence.
Should You Buy A Stock of a Company When Its Promoters are Raising Stakes?
Still, the question remains, should investors buy a stock of a company when its promoter hikes stake? The answer to that question is “Yes“. As promoters are aware of all the company’s information, preferential allotments tend to be a positive option for investors. When the damage done by price is huge, the promoter’s shares purchase indicates limited downside risk.
Reliance Industries, Induslnd Bank, Apollo Tyres, Godrej are the name of the few companies whose promoters have already seized the opportunity.
However, it is still crucial for investors to get all the insider’s activities of a company before investing. Besides, one should look for 3Ps before making an investment decision: purpose, pricing, and past track record of promoters buying. Tracking promoters buying and selling can also be an important factor that needs to be checked.
Conclusion & Recommendation
There’s no doubt that promoter holding is crucial in evaluating any business, but it should not be the sole parameter to decide investment decisions. The business fundamentals and valuations are of equal importance. Stick to quality stocks should be the investment strategy for investors regardless of any external triggers.
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