Reduction In Promoter Holding. Book Partial Profit

The Union budget 2019-20 may not have enthused equity investors much, but it has managed to make investors think about holding on those shares where the promoter holdings is more than 65 per cent. Indeed, one of the highlights of the Union budget was the announcement made by the Finance Minister Nirmala Sitharaman on the maximum shareholding by promoters wherein it was stated that no listed public limited company shall have promoters holding more than 65 per cent of the total shareholding.;

This move is believed to be in the long-term interest of the investors and the market participants alike as it can improve the liquidity in the markets as well as enhance corporate governance standards. Says Mustafa Nadeem, CEO, Epic Research " This is a historic move of the government and for the investors as well. This will bring a change where we would see a large chunk of the wealth of a company being passed on to an ordinary investor. They will have a stronger voice from here on. So, the move by the government is a great move, though it may have some other ripple effects."

When it comes to the impact on the stock prices, the opinion is divided on the announcement. While there is a broad consensus in the market that such a move will have a negative impact on all those shares where the promoter holding is more than 65 per cent, there is always a probability of the stock prices overshooting on the downside, thereby creating opportunities for the long term investors. It is not always easy to identify such lucrative opportunities, but then situations like these help long term investors create wealth.

As of now, the dilemma faced by a majority of investors is whether to hold stocks where promoter holdings exceed 65 per cent or to get rid of them – only because of the budget announcement.

Why the dilemma?

There is an age-old perception amongst investors that higher promoter holding is a good sign for investors as it reflects the commitment of the promoter. Also, it is considered negative when a promoter is consistently selling his or her stakes in the company. However, this time around, investors are faced a a dilemma created by the unique situation, where promoters of several companies are forced to bring down their stakes to less than 65 per cent. How does one decide what to do with the current holdings (stocks) where the promoter holding is more than 65 per cent? For sure, this decision if implemented will impact several portfolios and may lead to churning of the portfolios. Says Bharat Pawar, a long-term investor, “I have a focused portfolio and almost 10 stocks out of my 30 stocks have promoter holdings greater than 65 per cent.

I do think the development is negative; however, I am not sure if I want to get rid of all these stocks as these stocks have been contributing very well to my portfolio so far. I will wait and watch”.

However, contrary to the majority view, there are few investors who sense an opportunity for buying mis-priced stocks. According to long term investors, this development will present an excellent opportunity to buy fundamentally sound stocks at a discount--which were hard to find till now. Some of the stocks in the higher promoter holdings category with low free float in fact trade with a premium. One can expect the premium to reduce over time. The supply pressure may push the stock prices lower by 10 per cent or even more if we pay attention to the various offers for sale that took place recently. Such a drop in prices could present a buying opportunity in quality stocks. 

OFS, a shorter and less complex way to sell stake rather than through initial and follow-on public offers, was introduced by the Securities and Exchange Board of India (SEBI) in February 2012. OFS helps promoters of listed companies dilute their stakes through an exchange platform (BSE & NSE). The promoters are the sellers. The bidders can include market participants such as individuals, companies, qualified institutional buyers and foreign institutional investors.

PSU stocks The announcement in the budget to increase the liquidity in the markets by asking SEBI to bring down the maximum promoter shareholdings from 75 per cent to 65 per cent has opened a treasure trove for PSU investors. As the recapitalisation takes place, the government’s stake in the PSU banks is increasing and few banks are already reflecting government’s stake at more than 90 per cent. 

It is going to be a challenge for these banks to bring down the promoters holding from 90 per cent plus to 65 per cent. Even though it is obvious that the stake sale will not happen in a hurry and the sensible approach expected from SEBI is to extend this sale over a period of 3 to 5 years, it will be extremely difficult for these banks to find investors. There will be tremendous pressure on the stock prices of PSU banks going ahead. 

MNC Stocks

Several MNC stocks are expected to be affected by the recent announcement in the budget. Out of 30 stocks in the Nifty MNC index, there are almost 14 stocks that have promoter shareholding of more than 65 per cent. The average returns of these 14 stocks with higher promoter holdings since the budget announcement has been negative 2.54 per cent. This is when the Nifty MNC index is down by 2.1 per cent and Sensex is down by 1.96 per cent in one week from the date of announcement.

There is wide speculation in the markets that some of the MNCs may opt to delist themselves rather than dilute their stake by a further 10 per cent. While the possibility of MNC delisting cannot be ruled out entirely, this probability in our view is low.



When we check the performance of all the stocks with promoter holdings greater than 65 per cent, we find that on average these stocks are down by 2 per cent, in line with the key benchmark performance. This goes to show that markets have not reacted negatively yet on the announcement and there is no selling seen in these counters, i.e stocks with promoter holdings greater than 65 per cent. 

Vineeta Sharma,
Head of Research, Narnolia Financial Advisors.

Reducing Promoter Holding To 65% Will Increase Depth 

What should investors do with stocks where the promoter holdings are greater than 65%?
Decrease in stake of promoter to 65% will increase the liquidity and increase the float of a company. Each company should be individually judged on business, business environment, financials and valuations before deciding whether to hold the stock or not.

What is your take on the recent announcement made in the budget on promoter holdings?
Increase in public holding helps in increasing transparency and increased participation of the public. The announcement of reducing the promoter stake to 65% will help in increasing the market depth. Out of 1800 stocks where trading happens regularly, only 500 companies' average turnover is mere Rs.1 cr and only 220 companies have daily turnover of Rs.10 cr.

What are the positives (outcome) of such a move? The positive outcome will be that liquidity of stocks will increase and there will be greater participation of the public in the business of a company. This will also increase transparency in the activities of the company. In the process of reducing such stakes, the company will come in with rights/bonus issue or preferential allotment, OFS, etc which all will be coming in as a one-time short term reward to the common shareholders.

How have companies performed whenever the promoters have had to reduce their stakes in the company? In year 2010, when the ruling of promoters' shareholding to be reduced to 75% came in, many companies got themselves delisted (especially the MNCs who get dividend income from Indian subsidiaries and who would not want to reduce their shareholding in the company). On the one side, there is greater amount of confidence in a company where the promoter's holding is more as it depicts that the promoter's skin is in the business. On the other, as public holding goes up, it will increase the market depth and businesses will have greater transparency due to increased public participation.

What are you advising your clients on those stocks that are affected by the announcement?
We advise our clients to hold on to the good quality shares. This move has to be analysed on a case-to-case basis and the decisions have to be taken on individual stocks. 

Dinesh Thakkar,
CMD, Tradebulls Securities

The Move To Bring Down Promoter Stakes To 65% May Lead To Correction 

What would be your advise to those investors who are holding shares of companies where the promoter holding is higher than 65 per cent?
If the recommendation gets implemented, around 3.3 lakh of free float is expected to be generated. The proposed regulation cannot be implemented at once, but it has to be done in phased manner. Companies with promoter holding higher than 65 per cent are likely to under perform as excess stock liquidity may not meet with sufficient demand in all scenarios to ensure price stability. Until the stakes are sold, those companies will have an overhang on stock prices, as we have seen that most of the offers for sale done recently by companies to meet minimum public holding were done with a discount of 5 to 10 per cent to the market price. The move may lead to correction as many companies are trading at premium valuations due to restricted free float and may result in valuation normalisation. Our recommendation to investors would be to stick with quality stocks as in spite of overhang, strong business fundamentals of such companies will eventually take over the supply pressures and push the prices back to its premium valuation.

Is it correct that the stocks with higher promoter holdings trade at a premium due to low free float?
It is true that stocks with low free float tend to trade at a premium because of demand-supply mismatch. Low free float stocks tends to have lesser liquidity, which can result in possible mispricing of the stock. However, in order for a company to trade at higher premium compared to its peers, it still needs sound fundamentals as in spite of low free float, the demand from investors can only come if investors find business model attractive.

Where do you see out performance in markets coming from?
We expect out performance to be witnessed in financials, consumption and infrastructure. The June quarter results have started and it may be a repeat of March quarter performance, where the financials took the lead. The domestic consumption story remains strong and, in the long run, the government's fiscal discipline will attract foreign capital, which will partially fund huge infrastructure projects. 

Conclusion 
In the long run, what matters for the stock prices is the earnings growth. While earnings growth matters in the long run, the supply and demand for the stocks also play a crucial role in price discovery. If the proposal on shareholding as recommended in the budget is implemented, we all know the supply of shares will increase manifold and the demand may or may not keep pace, depending on several factors. Such a scenario may not be good for the stock prices in general and definitely not good for those shares where the promoter holdings is more than 65 per cent.

The secondary markets and the primary markets will have to be extremely robust to absorb such supply of equity to prevent a drastic fall in the stock prices. Investors, however, should keep in mind that stocks that are able to deliver superior earnings growth may not witness heavy fall in prices. In case they do, we will have an opportunity to grab quality stocks at discounts.

At this point of time it is prudent to book partial profits in those stocks where the promoter holdings exceed 65 per cent. The portfolio will require a churn and investors can take stock specific decisions as more updates related to earnings and shareholdings is available.