Promoter holdings in smallcaps jump amid stellar returns

Promoters of smaller companies in India have augmented their holdings in the last one-and-a-half years while those of large- and mid-cap companies pared their stakes, an analysis by domestic brokerage IIFL Securities Ltd showed.

Promoter shareholding in small-cap companies inched up from 49.2% in March 2020 to 52.7% in June 2021. In the case of NSE100 companies, it declined from 48.3% to 47.9%, and in NSE Midcap companies, from 55.9% to 53.8% over the same period, the analysis showed.

IIFL Securities studied shareholding movements in the April-June quarter and in the five quarters since the coronavirus outbreak last year, across market caps and in various sectors.

It considered all companies in NSE100, NSE Midcap and NSE Smallcap indices for the analysis.

Analysts said that the increase in promoter stakes underscores the owners’ confidence in a company’s growth potential.

This is reflected in small-cap shares recording a stellar rally in the past year, impressively beating their large- and midcap peers.

From March 2020 until June 2021, the Nifty50 index gained 40%, while the Nifty Midcap 100 index was up 61%, and the Nifty Smallcap 100 index gave the highest returns of 72%.

Not just the promoters but even mutual fund managers seem to have a positive bias towards small-cap stocks.

Analysts point out that data published by the Association of Mutual Funds, or Amfi, last month showed about a 150% sequential jump in funds inflows into small-cap funds when compared with a marginal 8% increase in large-cap funds.

Analysts have, however, advised investors to note that the smaller companies have gained from abundant liquidity finding its way into these stocks and mutual fund schemes, irrespective of the market fundamentals.

They said that the lucrative returns in such stocks within a short span are an indication that the key positive of the coronavirus-led accommodative monetary policy is already priced in.

Analysts, therefore, recommend investors to be cautious as they may have run ahead of themselves, ignoring some key downside risks.