Promoter Shareholding:What Does It Signify For The Investors?

Investors are always looking for stock specific triggers that they think will take their investments higher. Investors don their analyst hats and evaluate several metrics and ratios to gain insight into the future of the company. The patterns of promoter shareholding are a useful way to understand what the entrepreneurs at the helm of our favourite stocks think of their own businesses. The promoters of any company are usually the analysts with the deepest understanding of their businesses.


It is often believed that increasing promoter stake is a vote of confidence about the future prospects of the company. Promoters are often the largest shareholders in their companies and they are the driving force behind businesses. Hence, it is important to keep an eye on promoter shareholding patterns. However, while increasing promoter holdings is a good sign for individual investors, it should be used as a useful starting point for further analysis. It cannot be the sole criteria for investment decisions. 



As seen in the below table, only four companies recorded an increase in their shareholding, namely, HDFC Bank, Tata Motors, Tata Consultancy Services and SBI. A total of 13 companies saw promoters reducing their stakes in their respective companies over the last four quarters. A total of 11 companies reported no change in shareholding over the same period. The year 2018 proved to be a difficult year for the stock markets. In 2018, 15 Sensex companies delivered a negative return. A total of 13 Sensex companies managed to deliver positive returns during the period.

Promoter holding and price performance may not always be correlated, especially in larger companies. This can be seen by the example of Bajaj Finance which delivered stunning returns of more than 50 per cent, despite the promoters reducing their stake marginally by 0.13 per cent. Similarly, Axis Bank delivered in excess of 10 per cent returns, despite the promoter shareholding coming down by 4.33 per cent. 

PROMOTER HOLDING FOR BSE 500
Among the companies which have recorded an increase in promoter stake over the last four quarters, Bajaj Holdings & Investment has delivered the highest return of 25.52 per cent. The company’s promoters hiked their stake from 44.25 per cent in Dec. 2018 to 46.41 per cent in Q3FY19. Some other companies that have seen a steady increase in promoter stake include MRF, Raymond, Apollo Tyres and Chambal Fertilizers and Chemicals. A large number of companies in the BSE 500 saw promoters decreasing their stakes in their companies. However, it was observed that many of these companies delivered positive returns. The likes of Reliance Industries, NIIT Technologies, L&T Technology Services and Just Dial delivered positive share price performance by up to 43 per cent, despite promoter holding declining over the last four quarters.

On the flip side, companies like Eicher Motors, Edelweiss and Tata Global Beverages eroded investors' wealth. 



It is evident from the stock performances that a decrease in promoter stake does not always mean disastrous consequences for the companies. It is important for investors to try and find out why there has been a change in the promoter shareholding.

Promoters may be selling stakes for several reasons, including regulatory requirements, fund raising for some projects, retirement of debt, conflict of interest between promoters, bankers selling pledged shares of promoters, etc. Investors need not panic and offload their holdings. The reasons for promoters selling their stakes are often company-specific and these reasons should be well-researched and understood before taking a final call.

2018 was a particularly difficult year for small-cap stocks and several promoters chose to reduce their stakes during the time of crisis. The increases and decreases in promoter shareholding can be seen below: 

Sectors where promoters hiked stakes: The most notable increase in shareholding was witnessed in the textile sector. Kitex Garments promoters increased their stake in the company to 55.27 per cent from 54.8 per cent in the quarter ended March 2019.The promoters of Raymond have also been increasing stake over the last few quarters to 44.08 per cent from 43.34 per cent in the year ago period. Nandan Denim was also an important player whose promoters increased stake in the company over the last four quarters. In the chemicals sector, Atul’s promoters marginally hiked stake in the company to 44.70 per cent from 44.64 per cent in the quarter ended March 2018. Plastiblends was another company in the chemical sector that saw promoters increasing their stake to 62.66 per cent from 62.01 per cent in the December quarter last year. In the tyres and allied industries sector, MRF and Apollo Tyres were the notable players that witnessed a hike in promoter stakes. Among paper companies, West Coast Paper Mills promoters increased their stake in the company to 56.54 per cent as of December 2018 from 55.82 per cent in December 2017. Among the major fertilizer players, Chambal Fertilisers promoter shareholding rose to 58.72 per cent from 58.36 per cent in December 2017.

Jayant Manglik 
President, Retail Distribution Religare Broking


"Reduction in the promoter's stake does not necessarily indicate over-valuation of the stock. If the promoter is diluting his stake for raising funds to expand the company's business operations, then it is acceptable. Further, a one-off stake sale for some personal reason is also not a warning sign if the promoter clarifies on the same and maintains a controlling stake. However, a consistent dilution in the stake without any genuine reason is clearly not a healthy sign and warrants caution, as it reflects low confidence of the promoters on the company's future growth prospects and its ability to sustain the current valuations going forward"


Vivek Ranjan Misra 
Head of Fundamental Research Karvy Stock Broking


"Typically, the market reacts negatively when any promoter sells holdings. For example, the shares of Mumbai’s city gas distributor, Mahanagar Gas Ltd (MGL), had declined 4.5% as Shell India exited the city gas distribution business by selling its 10% stake in the company. The reverse is not always true. The companies with high promoter holdings tend to trade at a valuation discount to companies that are professionally managed or have a low promoter holdings. High promoter holdings mean minority shareholders have less influence in the affairs of the company and thus assign a discount. They typically tend to score lower on most corporate governance metrics. There is a very weak correlation between companies where promoter holdings have gone up and the performance of share prices. The context of the promoter increasing or decreasing shareholding is important and has a greater influence. For instance, among MNC companies, increased shareholding has been beneficial. Similarly, in times of turmoil, promoters buying stake has been helpful."


Conclusion
It is clear that tracking promoter shareholding adds a lot of insights in the process of stock analysis. It throws some light on what the founders of the business think about the prospects of their own companies. However, it should not be used as a sole measure for making investment decisions. Tracking changes in promoter shareholding should serve as a useful and important starting point in stock analysis.

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