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Do promoters know something that you don't?

Equitymaster 
Updated on 30 June 2020

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The higher the promoter stake in a company the more faith he has in the business. That is how the general belief goes. The same obviously holds true for the reverse as well. And this (lower promoter stake) is definitely something investors would not like.



In the chart below, we have tried to see the change in pattern of promoter holdings over the past few quarters. We have compared the average promoter holdings of companies from the BSE-100, BSE-Midcap and BSE-Smallcap indices. These have been classified as large-caps, mid-caps and small-caps respectively in the following chart.



It must be noted that we have taken the average promoter holding of all the companies that form part of the index during each of these quarters.

Change in promoter holding
Data Source: CMIE Prowess


As you can see from the chart, back in January 2008, when the markets touched their all time high levels, the average promoter holding during the previous quarter i.e., December 2007, stood at 50.4%, 53.7% and 52.9% for large cap, mid cap and small cap companies. However, as the markets continued to decline through the year, the promoters began to increase their stake gradually. This is quite evident from the above chart. Although the change in promoter stake of largecap companies seems to be flat, as per the data there is a marginal increase in promoter holding through this period.



The average promoter stake was on a rise till the quarter ended March 2009. This is for companies across the three categories. During the quarter ended March 2009, the average promoter stake in large cap, mid cap and small cap companies stood at 51.1%, 55.6% and 54.1% respectively.



However, as the markets have surged from their lows in March 2009, promoters seem to be making the most of it by selling their stakes. And surprisingly, it's the large and mid cap companies, whose promoters have reduced the most stakes. Unsurprisingly, promoters of selected real estate and engineering majors have reduced their stake the most during this period.



Conclusion

In bear markets, promoters tend to raise stakes. In bull markets, they tend to shed a portion of their stake by taking advantages of the market forces. And it is also very obvious that no one knows the situation of a particular company better than its promoter. But with the promoters of India's largest 100 companies unloading a part of their stakes as the markets rise, it must definitely send some signal to you, the minority investor.




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