Promoter holding & pledging explained: What does it mean for a stock picker?

One of the most important element within the checklist of picking fundamentally strong stocks is to analyse the promoter holding pattern of the stock. It is one of the most underrated metrics when it comes to forming an opinion of stock but it has deep-rooted impacts on the investor. Let’s simplify and understand what promoter holding and its pledging are! 

What is promoter holding? 

Promoter holding signifies a percentage of the ownership in equity capital held by the promoters of a company. As promoters & promoter groups are entities that have a significant influence on a company, the changes in their holding are paramount and insightful to retail investors. Even the industry regulatory body, SEBI has mandated all the promoters of listed companies to disclose their holding pattern and pledging created or discharged with seven days of any creation or discharge. You can find promoter holding for listed companies on BSE & NSE by searching for ‘shareholding pattern’ on their websites and can get period shareholding patterns (including promoter holding) of all the available shares of the company.  

What does an increase in promoter holding indicate? 

A rise in promoter holding is read positively by investors. It is akin to putting money where one’s mouth is. If prominent shareholders like promoters, who have a vested interest in the company are increasing their stake, it indicates that they are confident about the growth prospects of the company. By buying the shares of the company, they influence prospective investors to invest in the company’s shares; thus, increasing its price and consequently, their wealth.  

The table below shows five BSE 500 companies, which have seen an increase in promoter holding between June 2021 and March 2021 quarters. 

What does a decrease in promoter holding indicate? 

In contrast to an increase in promoter holding, a decrease sends negative signals to investors. It may indicate that the promoters do not have faith in the prospects of the company or do not have a sound strategy to tackle business competition. Given the insider status of the promoters, a decrease in their holding also discourages potential investors from investing in the stock and usually, leads to a fall in the stock price.  

However, a decline in promoter holding does always mean poor future prospects. Sometimes promoters, just like retail investors, may decide to liquidate some part of their holdings to fund personal purchases. Or sometimes, promoters may sell holdings when they are targeting an acquisition or starting a new venture. The reason for dilution could be regulatory changes. For instance, Securities & Exchange Board of India (SEBI), the market regulator, had come out with a regulation under which, promoters can't own more than 75 per cent stake in PSUs. 

Thus, if promoters have explained their reasons for reducing holdings, then it is not a red flag for retail investors. On the other hand, unexplained and consistent declines in holdings indicate a decline in the confidence of the promoter or may indicate that the promoter thinks the stock price has reached its fundamental value. 

The table below shows five BSE 500 companies, which have seen an increase in promoter holding between June 2021 and March 2021 quarters. 

Promoter share pledging: Why is it a bad sign? 

Companies need funds for multiple reasons, which include operational expenses, funds for the acquisition and do this by taking loans from banks and other financial institutions. If a company’s financial health is not up to the mark, banks hesitate in giving loans to such companies and they have to raise finances by pledging the holdings of the promoters as a mortgage. Hence, if a company has no option but to resort to taking loans by pledging their shares, it gives a negative impression to investors.  

There have been many cases where companies with high promoter pledging have been unable to discharge their obligations on time and this has resulted in the wealth of common investors being eroded – the most recent example being Yes Bank. Hence, investors should stay away from stocks having a high promoter pledging, especially the ones that show weak financial health as well.  

The table below shows five BSE 500 companies, which have the highest promoter pledge as of June 2021. 

 Bottomline: 

Promoters are the best insiders and analysts of any company with a clear understanding of the business plan, growth prospects, and vision. It is only natural that their activities are heavily scrutinised and draw a lot of retail investor attention. So, the trend of promoter holding and promoter pledging over time can be very helpful to understand how the promoter views the business. However, the rise and fall of promoter holding should be one of the many factors to decide whether to buy or sell a stock, not just the only factor.