Budget 2019 – More public ownership of listed companies

In the Budget 2018-19, FM, Nirmala Sitaraman announced a very profound decision. To increase public holdings in listed companies to 35% from the existing 25%. After this announcement, market turned down due to fears that many corporates will now be forced to offload promoter stake to meet the requirements.

Added to the decision was a 20% tax on buy backs, which means that, it is going to be costlier for companies to buy back their own shares.

I would say this to be one of the landmark decisions in the recent past. Market’s reaction though was pessimistic, whereas it was a very good decision. If companies use profits to buy back equity and reduce capital, it is in no way going to be beneficial to the country. If capital is not deployed or put to best use, economic activity slows down, employment takes a hit.

Western world is sinking today because of this reason, most of their companies are not investing to add capacities, they are buying back shares and killing the economy. If we don’t learn from their mistake, we will also face the same condition. At least for them, they have capital, which the governments are investing into other economies and give social security to their citizens.

In our country we are yet to come out of deficit financing to run our economy, where is the possibility of deploying capital in other economies. And we are country with huge population, if employment dwindles economy will die.

In our country we have many promoters who were hell bent, not to bring down their holdings in their company’s even to the previous requirement of 25%. Examples were big names like Uday Kotak of Kotak Bank, RK Damani of DMart, Wipro, TCS, HDFC Life etc. Now they face even more challenge. Markets turned negative after the announcement because there will be more supply of shares in the market which can dampen demand.

It will only be a small time challenge, in the long run it is actually good. Today our Mutual Fund market has matured. People are moving to financial saving in a big way. Monthly SIP’s are at 8000 plus crores, which means 1 lakh crores of investments are coming into the market every year. What to buy with this money?

Fund managers keep adding the same stocks more and more to their portfolios. We don’t have many listings happening in our country even though India is the heaven of start-ups. Listing issue can be because most of them are yet to earn any revenue and those who are having revenues are not yet profitable.

If supply of good stocks is less, PE expands and then comes valuation issue.

We need more shares in circulation to absorb the funds that are hitting the markets, else we will get into a bubble and burst killing all of them in one go. In our country any thing good is done, it is always welcomed on a bad note. All because of short term thinking. We are more worried about today’s meals not bothered whether we are living tomorrow.

This comes due to poor confidence on our own selves, which is a big topic to discuss.

Why are promoters are willing to dilute? The only reason is ‘selfish’, that they want a big pie of the riches their companies are going to generate. On one side world is talking big giveaways in the name of philanthropy, in our country we are still hoarding.

IN fact we should not encourage these kind of promoters to do business, they get business from the citizens of the country whereas reluctant to share wherever possible.

Buy into these stocks that will liquidate promoter holdings if they are fundamentally strong and have a close watch on them, as there can be other possibilities where these promoters can short change due to their greed.

 

SENSEX goes Partying, Mid & Small Caps left behind

January 2018 has brought a lot of good news like the IMF reports suggesting good GDP growth numbers, PM giving the keynote at Davos, world looking at India as their investment destination and along with that some very interesting movements in the market. Broad indices like SENSEX & NIFTY going higher and higher while the mid & small caps are going down.

Due to SEBI’s decision to re-organize Mutual Fund portfolios, to have one scheme per category and Large Cap schemes should have a prescribed percentage of large cap stocks in their portfolio. Until now, funds used to have good amount of mid and small cap exposure which helped them achieve better returns against the benchmarks. Now, that has got changed and hence, the shuffle of selling mid and small caps to add large cap stocks to the portfolios.

First instance of the regulator’s over interference on the financial assets has begun to show up. Mutual Funds are now forced to buy more of something that is not good in quality, the reason why they shunned them. Because of buy orders in huge quantities that have created artificial demand, prices are going up and with them the broad indices too are reaching for higher highs. Once the buying is over, markets will begin to react.

The huge flow of retail money, which has come into the markets after seeing big growth and with belief that the economic activity is really strong to continue the growth momentum, is going to get a big surprise. All the belief’s and the environment are perfect without any change. The only concern now is the regulator who in the thought of bringing more transparency is creating more challenges to the market participants.

This over indulgence will create underperformance and deplete the quality as well as the belief of the retail investors, who have put in a lot of investments into the mutual funds expecting returns that were made in the last year. When the retail investors experience poor performance, they will begin to withdraw their investments which will create pressure on the fund managers to liquidate, to meet redemption pressures. Which will again force them to sell mid and small cap stocks which have been the performers and further bring down the overall performance of the schemes.

In India, many a times, it is the regulations that are causing bigger challenges and bring down businesses. Later, the blame goes to the operators.