Analysing Promoter Shareholding Patterns for your Stocks with Real Examples (2024)

It makes sense to keep track of what promoters are doing with their shares. It may give you a clue about where the company is headed. Let us see how to look at promoters shareholding patterns (and beyond just the data) with real life examples.

Background

We looked at promoter pledging of shares and how it impacts the quality of management for the stock that we are trying to analyse.

While promoter pledging is definitely a more serious metrics, but the trend and pattern of promoter shareholding itself can help us take many informed decisions for stock selection.

Who are Promoters?

Promoters are generally the biggest shareholders in their companies. In most cases, they are the ones who were also the founders of the company.

Why to track Promoter Shareholding?

Promoters are also the most clued in on the company's prospects.They are the insiders, and they have the best knowledge of their company. They understand the product/services offered by their company, its demand in the market and the future growth potential. They understand the culture of the company and realise where it is headed. Further, they are also regularly updated on the finance of the company. They know how much revenue and profit their company is generating and how much financially strong/weak they are. They also understand to a large extent whether the published financial data reflects the true health of the company or not.

That is why investors must keep a close look on what they are doing with the shares of their own company. This is because it offers clues about what they think about the company's future. For instance, a trend of heavy buying may indicate that they think that the stock is undervalued compared to its intrinsic value. In any case, selling and buying by promoters leads to changes in prices of stocks and so must be keenly watched.

ConsistentPromoter Buying is a Positive

A promoter has all the internal information about the company. If the promoter is investing, it shows that he / she is confident about the prospects of the company and believes that investing in the company is better than putting money somewhere else.

But Look Beyond the Data

Although an increase stake by promoters is a positive, investors need to look beyond pure numbers to get a feel of what is happening. One should look at the reasons behind any move where promoter buying shows a sudden spurt, and must ask whether the company is preparing for de-listing, or is there a corporate restructuring happening.

Example - Essar Oil

As an example, take the case of Essar Oil, in which promoters raised their stake from 16 per cent to 25 per cent. The reason for this was the company's plan to de-list. A company has to make an open offer to the public if it wants to get de-listed. Also, the public holding shouldn't be more than 10 per cent after the open offer for the de-listing to happen. Therefore, to make the open offer successful, there is a high chance that the company may increase the floor price at which it offers to buy shares from the public. It will lead to a rise in the price of the stock and provide an opportunity to investors to sell at a higher price.Therefore, generally, promoter buying is a positive move for the investor.

Promoter Selling should be seen with caution

While promoter buying is generally seen as a positive sign, promoter selling should be seen with caution.

Example - Satyam Computers

Let us look at one of the biggest corporate scams in the Indian stock market where thousands of investors lost their money : The Satyam Case. In this case, the Satyam computer services chairman Ramalinga Raju confessed that the company’s accounts were falsified and they manipulated the reports of Rs 14,162 crore in several forms. The confession was shocking for the both corporate and the investing community. However, if the investors had carefully looked at the shareholding pattern of the company, they would have realised that the promoters were gradually decreasing their stakes from their own company year-after-year - which indicated a loss of confidence.

A look at the shareholding pattern of the company over the years reveals that the promoters held 25.60 percent equity as of 2001 but reduced their stake every subsequent year.

By 2002, the promoter’s stake got reduced to 22.26 percent and further down to 20.74 percent as of 2003.

As of 2008, the promoters held only 8.61 percent stake.

This continuous decrease in the promoter’s share in Satyam Computers was a warning sign which most shareholders ignored.

What does decrease in Promoter Shareholding signify

As a thumb rule, a continuous decrease in the promoter’s share from their own company is not a healthy sign. This is because the decreasing stake means a low confidence of the promoters (who are actually the owners) towards the future of their own company.

Therefore, if the promoters are optimistic towards their company’s future and have a clear vision/goal for its growth, they will not want to sell their shares or reduce the stake in the company which they themselves started. In short, if the promoters are continuously decreasing their stake, then you might need to investigate further and take cautionary actions.

Look Beyond the Data

Decrease in Promoters share may not always be a bad sign for the company. If the promoters are openly mentioning the reason why they are reducing the stake or if the decrease in the promoter’s share is just a one-time activity, then it might not actually be a bad sign. This may be, in fact, good for the long run of the company.

Look at it like this.

If you want to buy a new house, and for that, you are digging into your savings and deposits, then it may be good for you in the long run. But if your savings balance is showing a trend of consistent depletion for many years, then this should definitely be a sign of worry, whichneeds further analysis and investigation.

Same way, it is possible that the promoters are planning for a new venture, new acquisition, a new company or just to buy a new house. Everyone has the right to use their asset when they need it. If the promoters have some different plans, then they might sell their stakes to raise capital, and it’s not a warning sign at all.

Example : Amazon

If you follow the international market, you might have heard that in April’17, Jeff Bezos, the owner of Amazon company sold $1 Billion worth shares of Amazon.

Should the shareholders panic and sell off their shares too in such a situation?

No, because at that time, Jeff Bezos was selling the shares to fund his Blue Origin rocket company, which aims to launch paying passengers on 11-minute space rides starting next year. Overall, the company fundamentals remained the same. Just because the promoter holdings decreased in a specific year, doesn’t mean that you need to get rid of the stock. You need to evaluate the reason, and if you are convinced, you need not take any action.

Conclusion

An increase in promoter share is usually a good sign. But a decrease in the promoter’s share might not always be a bad sign. You need to look beyond the numbers and investigate why the promoters are selling their shares. If the reasons are genuine, then you might not worry. However, if the stakes are continuously decreasing and you can’t find any reason- then you might need to look into the matter seriously.

Regards