Trend: Mid cap shares saw selling by MFs on valuation peak concerns

TREND: Mid cap shares saw selling by MFs on valuation peak concerns

Domestic mutual funds took the sustained rise in mid cap index to book profit in select stocks last month to sell shares in companies from the index and partially book profits, but continued to be on a net buying spree in small cap stocks.

The number of shares held by mutual fund schemes in Nifty Midcap 150 companies declined nearly 1% on month in August, following a 4.2% increase in the previous month, analysis of mutual fund data showed.  The mid cap index ended August 3.6% up on month making it the fifth consecutive time it rose on month. From Mar end to Aug end the index had risen 29.4%.

It indicated a paring of exposure by mutual funds in mid cap stocks which analysts point out was likely selling stocks where valuations were considered to be at peak or near peak levels. Brokerage Nuvama Institutional Equities said in a Sep 15 report that mid cap stocks warranted caution due to above-mean valuations even as it did not see it as a bubble.

The on-month decline in mutual fund holding of mid cap shares in August was the second time in six months. There was a 2.8% dip in June.

In the mid cap selling action in August, mutual funds cut their exposure the most in GMR Airports Infrastructure Ltd, Patanjali Foods Ltd, The Supreme Industries Ltd, Ashok Leyland Ltd, Bharat Heavy Electricals Ltd, and Natco Pharma Ltd. The paring ranged from 15% to 40% in these stocks. In all mutual funds reduced their exposure in 65 mid cap index companies in August, up from 57 in July, the analysis showed.

The mid cap index is the only broad based one currently trading at a historical premium over Nifty 50 on a trailing price to earnings basis, Samco Mutual Fund's chief investment officer, Umeshkumar Mehta told Informist. The euphoria has led to valuations peaking and probably led to fund selling, he said.

The mid cap index has rallied more than 40% over past six months "and currently undergoing a healthy retracement," said brokerage ICICI Securities in a report on Sep 18.

 The August selling action in mid cap index was notwithstanding a rise in net inflow in dedicated midcap funds to 25.12 bln rupees from 16.23 bln rupees in July. As per Securities and Exchange Board of India's rules, a mid cap fund need to invest minimum 65% in mid cap stocks. Most mid cap funds tend to have invest in large cap stocks after fulfilling the minimum 65% condition. Multi cap fund and flexi cap funds also hold mid cap stocks in their portfolios.

 IN CONTRAST

Unlike the trend in mid caps, mutual fund holding in small cap Nifty Small Cap 250 index companies jumped nearly 10% on month in August after staying nearly flat in the previous month. Like it mid cap peer, the Nifty Smallcap 250 index has been rising on month without a break since March end, and in August it recorded a 3.1% rise on month.

 In the case of shares of large cap companies, aggregate mutual fund holding went up 2.7% on month in August as compared to 1% increase in the previous month. This seemed to be on account of opportunity buying as the Nifty 100 index, which comprises of 100 large cap stocks, declined in August ending 2.4% lower than its July end level.

Going forward, analysts are cautious about the valuations in both, mid caps and small caps and expect fund managers to seriously explore profit booking opportunities.

Brokerage Kotak Institutional Equities noted in its strategy report on Sep 11 that many of the new favorite mid-and-small cap stocks of institutional and retail investors are in the investment sectors such as capital goods, defense, electronics manufacturing services, railways, real estate, and renewables.

"These stocks have delivered eye-popping returns in the past 3-6 months… we expect a decent investment cycle, but we are not sure about the quality of many of the stocks given their historical weak execution and governance track-records," the report added. The brokerage attributed the steep increase in such stocks as reflecting irrational exuberance of investors.  End

  https://www.informistmedia.com/trend-mfs-pare-exposure-to-mid-cap-index-shrs-on-valuation-concerns/

SEBI Watch: Going back to fixed price delisting is not progressive

SEBI Watch: Going back to fixed price delisting is not progressive

August 18, 2023

Going by the proposals in the latest consultation paper on delisting regulations review, the Securities and Exchange Board of India is keen on turning back the clock back by 20 years on the issue of public shareholder empowerment and tilt towards facilitating ease of business in the securities market for unlisted and listed companies.

It wants to provide allow an option to listed companies to voluntarily delist by way of fixed price and not just compulsorily have to do reverse book building process as is the case currently. Voluntary delisting happens when a company's promoters or controlling shareholders offers to buy shares from all the public shareholders, and if in the process public shareholding falls below 10% as per current SEBI norm, then they could delist the shares from the stock exchanges.

The reverse book-built route replaced the fixed price route in 2003 when SEBI framed separate guidelines on delisting. Till then delisting norms were specified in an Apr 1998 circular of SEBI where voluntary delisting by a company was allowed only by a fixed price method where average of last six months traded price of the shares determined the exit price.

A closer look at the most vital proposal of doing away with compulsion of delisting by way of reverse book building process only reveals that the move is not aimed at protecting the interests of the public shareholders who invested in the shares of a listed company in good faith only to find that company wanting to get out of the listed market.

"As a part of SEBI’s constant endeavour to align regulatory requirements with the changing market realities as well as to enhance efficiency of the delisting mechanism, a need is felt for a comprehensive review" of the delisting regulations, said the regulator in the latest consultation paper inviting feedback from market participants and investors. The SEBI paper did not specify what the changing market realities were.

The actual unchanging reality is that public shareholders' interests need to be safeguarded from the whims of company promoters or new acquirers taking control. Reverse booking building process gives power to the shareholders to determine the fair price at which the company could take their shares and delist.

A delisting panel report in 2002 had recommended the introduction of reverse book building as it felt it "would provide the transparent, fair and reasonable mechanism for pricing of the shares and which ensures investors’ participation in the whole process of delisting." How could this shareholder empowering measure not deserve its full due now?

SEBI, in its wisdom, has decided to be concerned for the promoters or controlling shareholders wanting to delist and make the process easier and cheaper for them. The market regulator is going by the thinking that artificial barriers to free exit to companies ultimately prove to be entry barriers.

But what does to the core goal of SEBI Act to protect the interest of investors? In removing barriers to companies SEBI is creating new ones for investors, particularly long-term investors. The 2002 delisting committee report had warned that "fixed price exits based on recent market price would lead to higher incidences of delisting during depressed market conditions," and would not " not contribute to good corporate governance."

There is another reason put forward by SEBI which again indicates a definite tilt towards promoters or controlling shareholders of delisting companies. In a recent press conference, SEBI chairperson Madhabi Puri Buch said the regulator had looked at trading data in shares of companies under voluntary delisting and found that speculators were buying shares in bulk and moving up the share price. But she also clarified that the trades by such suspected speculators or operators were not illegal.

The point to note is that SEBI has not disclosed details of any such case in the consultation paper. Without clear evidence that operator manipulation of the reverse book-built price is happening and happening across the board it makes little sense to allude to it and use it a justification against the reverse book building process. Further, even if book-built prices are higher than they would be without the speculative trades it causes no detriment to public shareholders for whom a higher exit price is only better. The only affected party is the company seeking delisting.

The current delisting norms already give the freedom to the promoter or the controlling shareholder to reject the book-built discovered exit price. And if it rejects no harm is done to non-speculator public shareholders who placed bids below the final exit price. The shares would continue to be listed and traded on the stock exchanges giving them opportunity to avail of market-determined price to exit any time. As far as the promoter or controlling shareholder is concerned it already has the option to seek delisting again after six months. The world doesn't end for it either.

The additional fixed price option that SEBI now wants to provide delisting-seeking companies would mean an end to reverse book building. There will hardly be any company which will choose the reverse book building option. The only benefitting party will be the promoter or the controlling shareholder. It certainly won't be the public shareholder.