How Important is to Know Changes in Promoters’ Holding

Many promoters have increased/decreased their equity stake last recent quarters.  Reviewing the change in shareholding pattern, specially that of promoters, could be useful to the investors. As a rule of thumb, higher promoters stake is perceived as positive and a lower equity stake could mean low confidence of promoters in their own company.  Rise in promoter stake is considered positive as promoters will commit additional fund only when they are optimistic about future growth of their company. 

Rise or fall in promoters holding is to be studied by looking at two aspects, First what is purpose of promoters in raising or reducing their equity stakes, second, the methods promoters have adopt to increase or reduce their ownership.

An increase in promoter stake does not always constitute a sign of confidence.  It is also necessary to see whether fresh funds have come in.  If fresh fund have been invested, where will there be invested.  Answers to these questions would help investors to determine whether jump in promoter stake is beneficial to the company. 

In few cases, promoters put in additional funds to retire debt and strengthen their balance sheet.  This is certainly positive for the shareholders. 

Similarly, companies that have gone for share buy back also see rise in promoters stake.  The core objective of a buyback is to create wealth, but it also increases promoters equity stake at no additional cost.

On the contrary, when companies that have opted for rights issues promoters forced to step in to bail out the unsubscribed portion, there is an unintentional rise in promoters stake.  Shareholders declining to subscribe to rights issue and promoters chipping to rescue the issue does not qualify to be positive development. 

Similarly, a decline in promoter holding should also be analyzed in detail.  Decline in promoter holding can be due to various factors such as fresh issues of equity shares to non-promoters through QIB, offer of GDRs and so on.  Also, it could be due to reason such as issuing fresh share towards employee stock option, or it could be due to offloading/issuing of fresh shares to strategic/financial partners.

Many companies have garnered financial resources through offloading fresh equity shares to QIB (Qualified Institutional Buyers).  As a matter of fact, QIBs have helped many companies to remain afloat during difficult times of 2009.

However, promoters offloading their holdings in the open market is a warning signal.  Some dubious companies announce positive development periodically, promoters keep on offloading equity stake at the same time.  It is well laid-out trap for investors.

While studying the change in shareholding pattern, particularly that of promoters, it is imperative for investors to establish whether it is beneficial to the company.  For instance, cash coming into the business is positive for company.   However, rise in promoters stake due to merges or buyback means little for investors in real terms. 

Establishing whey promoters’ equity stake has gone up or down is not an easy task in many mid/small companies.  Therefore, investors have to be cautious and find out the nature of transaction that has led to change in promoters holdings.