The jury is still out on how much money will actually flow to mid and small caps on the back of the recent regulations of SEBI (Securities and Exchange Board of India) with respect to allocation of flows in multicap funds, we have attempted to identify factors that would encourage funds to invest in mid and small caps in spite of the inherent limitations of liquidity (given the float) and vulnerability due to the absence of scale.
Vision and purpose combined with a clear execution strategy -Where does a company want to be in three to five years and what are the steps it is embarking on to get there? COVID-19 and other extraneous factors that increase volatility in business conditions are now the new normal. The key is that this is a journey and ‘progress over perfection’ is the monitorable. A clearly articulated ‘Purpose’ for all stakeholders including employees needs to be in place.
Shareholding and float - A promoter holding between 50 per cent and 55 per cent is a good start to ensure adequate float and this also allows the promoter to increase stake in volatile markets. If there is a pledge, a good sense of the rationale and the time frame to free up the pledge is key. Investors dislike pledge, potential margin money calls and most importantly unrelated investments using equity as a collateral.