Change in Pro­moter hold­ing—what does it sig­nify?

Dalal Street Investment Journal - - EXPERT SPEAK -

The key learn­ing from GST im­ple­men­ta­tion in other coun­tries strongly sug­gests that in­vestors in In­dia should pre­pare them­selves for a cor­rec­tion in the short-term.

Have you ever heard of a busi­ness­man sell­ing his busi­ness which is gen­er­at­ing prof­its? The an­swer would be ob­vi­ously 'No'. But we can ex­pect pro­mot­ers to sell shares if the busi­ness is not do­ing well and not meet­ing their ex­pec­ta­tions.

Pro­mot­ers are among the first few to know if there is trou­ble brew­ing in their busi­ness. If the is­sues seem un­man­age­able; they will con­sider sell­ing their stake. Go­ing by the same logic, we can also con­sider that when a busi­ness is do­ing well, pro­mot­ers may ac­quire more shares to in­crease their share­hold­ing. To em­pir­i­cally ver­ify whether this logic works, we an­a­lyse BSE 500 com­pa­nies to see whether in­crease or de­crease in pro­moter share­hold­ing has an im­pact on the share­hold­ers' wealth.

In this study, we have ob­tained pro­moter hold­ing from June 2007 till June 2017 of the BSE 500 com­pa­nies. We have deleted com­pa­nies which do not have con­tin­u­ous data for this pe­riod. We first cal­cu­lated price CAGR based on the pro­moter hold­ing and so we di­vide com­pa­nies based on the pro­moter hold­ing as on June 2007. As can be ob­served in Ta­ble-1, when the pro­moter hold­ing is be­tween 60-75%; the av­er­age of CAGR is close to 17% which is high­est among all the groups and this val­i­dates our un­der­stand­ing that high pro­moter stake helps re­tail share­holder in gen­er­at­ing higher re­turns.

We can also ob­serve that, on an av­er­age, the re­turns go on in­creas­ing as the pro­moter’s hold­ing goes up. The com­pa­nies that are grouped un­der pro­moter share­hold­ing cat­e­gory ‘over 75%’ are typ­i­cally com­pa­nies where con­trol is with the gov­ern­ment and the ob­jec­tive of these com­pa­nies is not just profit max­imi­sa­tion and share­holder wealth cre­ation. If we look at com­pa­nies where the share­hold­ings of pro­mot­ers is ‘be­low 20%’ we see that the re­turn in this cat­e­gory is low­est as com­pared to other cat­e­gories.

To test the logic that pro­mot­ers should ac­quire a greater stake when com­pa­nies are do­ing good, and de­crease share­hold­ing when they do not see a bright fu­ture ahead, we se­lected com­pa­nies where pro­moter hold­ing in June 2007 was 50% or lower. Then, we cal­cu­lated the change in share­hold­ing be­tween June 2007 and June 2017 and grouped them into two broad cat­e­gories; one, com­pa­nies where share­hold­ing has in­creased; and, two, com­pa­nies where share­hold­ing have de­creased and cal­cu­lated price CAGR. In Ta­ble-2, we can see that the max­i­mum re­turn is gen­er­ated when share­hold­ing has not changed be­tween June 2007 to June 2017 and it is around 20%. This sug­gests that pro­mot­ers who were con­fi­dent about the com­pany con­tin­ued to hold their share­hold­ing. We also see that in com­pa­nies where the share­hold­ings have in­creased from

0-20% have gen­er­ated price CAGR of around 16%.The worst per­form­ing stocks are those where pro­mot­ers have sold shares and de­creased their share­hold­ing and the av­er­age price CAGR is 4% and 9%.

For re­tail in­vestors, the con­clu­sion is un­mis­tak­able—com­pa­nies where pro­moter hold­ing is high will do good in the long run. Con­versely, re­tail in­vestor should be cau­tious when pro­mot­ers are de­creas­ing their stakes.

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