Promoter Holding Analysis and Actions before Investing

 

 Promoter Holding Analysis and Actions before Investing

                                        Credit Image By Pxfuel.comMany retailor investors must have read the article that promoters of more than 100 companies have bought their companies’ shares from the open market in the first a quarter of the current financial year i.e. 2020-21 and more than 50 promoters cut their stakes in the same quarter.

Companies whose promoters have increased their stake by buying the shares from the open market the stock of those companies have boosted from 10-200% from the previous low value.

Why promoters are buying the shares from the market and how it impacts the normal retailer investor let us understand.

As per Sebi's guideline for the public limited company, the shareholding should be 75% by the promoter and 25% by the public. But for FII (Foreign Institutional Investment) limit is different for different stocks.

Ideally if the promoters are buying the shares from the open market must boost up the share price because it shows that the promoters have confidence in their business and their business may have good future prospects.

But this is not always true.

As an investor who is investing in the stock always track the promoter behavioural action before investing in the stock.

Investor should consider the following two aspects before investing in the stock with respect to promoter holding news.

1.       What is the reason behind increasing or decreasing the stake by promoter?

2.      The method of changing the holding pattern

For example: generally, promoters are relatives of each other in the company, in such cases, many promoters use to gift the shares to others and change their stakes.

There are so many ways to change the holding pattern like gift, interlay transfer etc.

So as retailor investor, you should know the director or key managerial person who has rights to take the decision of the company and his behavioural action.

What are the reasons that promoters are increasing or decreasing their holding?

1.       There may be future growth of the company.

2.       Promoters may be buying the shares from open market  and pledging their shares as collateral

3.      Some companies are paying high dividend their promoters also use to buy the shares from the open market to get maximum gain.

4.      To liquidate the money by buying the shares from the open market will give a positive impact on stock price hence they will buy at a low price and sell at a high price.

Let us understand in details.

Promoters are increasing their stake (Buying the shares from open market)

If promoters are buying their stock means they know the position of the business and which is not known to retailor investor. It might be due to future growth is expected to be bright. If these persons are positive on this stock then as a retailor investor you should also think positively.

For example one of the Auto company has bought the share at the price of 451 but still stock price dropped down to 250 but even that price promoters have bought again the shares but share price dropped to 170 but after few months they have increased their business in other countries as a business has the great prospectus and then share price increased substantially

Buyback is also an increase in promoter holding. This also gives a positive impact on short time.

Sometimes it may be a trap. This is to increase market sentiment promoters use to spread the news that they are buying the stock and they have acquired a big deal.

The retailor investor gets carried away by hearing or reading the news of the company and they will rush to buy the stock. Due to the rise in demand for shares in the market the price will get boosted. As they reached the target the promoters will sell their shares and liquidate the money and as a retailor investor, they will lose the money because the retailor will not go in deep to find out the about the good news whether it was really right or wrong. Because this news is purposely spread to create positive sentiments. Also, they did not go in deep about the selling of the stocks by the promoter during this period.

Sometimes promoter increase their stakes by buying the stock but simultaneously they may pledge their shares or keep their shares as collateral.

Any promoter increase the stock price by buying the stocks from the market, it is short term sentiment.

Third, the reason is profit skipping. Many companies declare a very high dividend. To acquire the profit promoters used to buy shares from the market and increase their stake so that the maximum profit they can acquire. So the company who gives high dividend their stock will not perform but they can give a high dividend. These companies are useful for those people who are retired who don’t want to take any risk, this will give consistent high dividend more than the FD interest rate.

If promoters are decreasing their holding, is it negative for that stock or not?

As a thump rule it is negative, but it is not always right.

Sometimes promoters are issuing ESOS to their employees in that case also the promoter holding gets decreased.

Sometimes promoters are bringing new strategic partners in the company for example if any the company wants some new technology, in that case, they will offer their shares instead of directly paying the money

Other the reason may be that promoters are selling their holding for debt repayment.

Sometimes promoters reduce their stakes for meeting the regulatory norms for example Uday Kotak has sold his shares of the amount 6900 crores to reduce his stake from Kotak Mahindra Bank to 26.1%

ICICI the bank sold 4% stake in ICICI Lombard to strengthen the balance sheet for bad loan burden adjustment.

Sometimes promoters sell their shares for a personal reason also.

But suppose, promoters are exiting from the company then it is a negative impact on the stock.

What should be the promoter’s holding in the company?

As per Sebi's guideline for the public limited company, the shareholding should be 75% by the promoter and 25% by others it may be public, mutual fund, FII or DII. For FII (Foreign Institutional Investment) limit is different for different stocks.

Let us understand the promoter holding in the company, suppose public shareholding is 25% and promoter holding is 75% is it good or bad?

It’s bad because there is no institutional investment in their stock. As these institutional investors like FII, DII, Mutual fund etc. are not interested in this stock they don’t see any future growth of the company.

As per the study report if the promoter holding is between 35-60% then it is good a stock If the promoter holding gone below 15-20% then it is not a good indication for that stock. And between 20-35% it is borderline. So you should not invest in a stock in which promoter holding is below 20%.

But in some companies, the promoter stake is 0% like Larson and Turbo but the FII, DII and mutual fund have more stake in the company.

If FII stake is very high then that stock is bullish or bearish?

There might be both ways as if FII stake is high then demand that stock is very high, FII is very much interested and they are not able to buy further. But there may be disadvantages also suppose if FII is getting out from the market for profit booking then the stock in which FII have an invested huge amount and if they sell these stocks then those stocks get the very low price. When FII is investing in the stock then the market will be bullish and when FII is selling the stock then the market will have become bearish

So what retailor An investor should do?

1.       An investor should analyse the reason behind rising or decreasing promoter stake

2.      An investor should track on the behavioural pattern of promoters

3.      If any promoter sell their stake in the large deal then the investor should track the reason.

4.      Investor should analyse the pledging data which is easily available on any web site like www.moneycontrol.com.

5.      Read the research the report, Broker’s report.