Sebi amended the takeover norms recently by allowing promoters to increase 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 raising capital. It will also provide greater flexibility in pricing preferential issues. This option will help promoters in securing funds from their promoters in an effective and efficient way along with the feature of accessing investments from institutional investors via QIP’s (Qualified Institutional Placements) on a regular basis.
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. As it may help the market to stabilize because of flows from promoters will tend to be more long terms in comparison to other institutional flows, Thus might boost investor’s confidence.
Still, the question remains, should investors but a stock of a company when its promoter hikes stake? The answer to that question is “Yes“. As promoters are aware of all company’s information and preferential allotments are tends to be a positive option for investors. When the damage done by price is huge, the promoter’s shares purchase is an indication of 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 still is very 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 of promoters buying and selling can also be an important factor that needs to be checked.
There’s no doubt that promoter holding is an important factor to evaluate any business but it should 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.