Change in Promoter holding—what does it signify?
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.