What are promoters hoping to accomplish by selling stakes?
What are promoters hoping to accomplish by selling stakes?
The stock market is doing really well, and both the Sensex and the Nifty are reaching all-time highs. The total market capitalization of corporations is also setting new highs. As a result of the significant gain in valuation, the promoters of many different companies are cashing in on their investments by selling their shares of the company.
The crucial question that arises for everyday investors in such a scenario is, “What actions should they take?”
During the three months spanning April to June, the promoters of approximately 110 different companies have sold shares in the open market for a total value of approximately Rs 16,000 crore.
Companies such as HDFC AMC and Vedanta Fashions, as well as HDFC Life, Easy Trip Planners, and TD Power are included in this category. The promoter of HDFC AMC, Abrdn, was able to sell its 10.2 percent interest in the company during the month of June for the price of Rs 4,079 crore. End of June saw the promoters of Easy Trip Planners sell 5.75 percent of the company’s shares on the open market.
Concern over the selling practises of promoters
Selling shares in the company that is doing the promoting is not seen as a positive move. When the promoters of a firm start selling shares, it is a sign that they do not have as much faith in the company as they once did. They do not have a great deal of confidence in the continued expansion of the company. When this occurs, the price of the shares begins to fall after the sale of the shares by the promoters; this is due to the fact that regular investors also begin selling in it at this point.
For instance, in the previous month, the promoters of Clean Science, Asha Ashok, Neelima Krishnakumar, and Asha Ashok Sikchi, stated that they would be selling some of their ownership in the company on the open market. Following that, the share price began a downward trend.
However, this is not always the case with a transaction being made. Take HDFC AMC as an example; following the sale of a significant share by one of the company’s promoters, the stock price increased by around 35 percent during the June quarter.
Over the course of the past three months, most of the companies whose promoters have sold their shares have seen an increase in the price of their shares.
It’s not always a bad thing
It is not always required for the sales of promoters to be bad; this is not the case. It is also possible that the market valuation of a firm has gotten excessively high, and the promoters of the company wish to capitalise on this situation in order to generate some gains for themselves.
To satisfy the requirements for listing, the promoters are sometimes required to sell their stake. A rule states that there must be a public stake in a corporation that constitutes at least 25 percent of the total. Patanjali Foods was required to make a follow-on public offer in order to comply with this regulation. For the same set of reasons, the promoters of Clean Science were forced to sell their share of the company.
When there is a need for additional funds and also to repay the loan, promoters may frequently sell their ownership in the company. For instance, the promoters of the Adani Group have recently been able to generate a significant amount of capital by selling an interest in their respective enterprises to the American firm GQG Partners.
What kind of actions should investors take?
You should strive to avoid being swayed by greed or euphoria on the stock market, and instead aim to go against the trend of trading. This is common advice given by many gurus in the stock market. That is to say, when other people are engaged in heavy purchasing, you can boost the profit of your portfolio by selling some shares; conversely, when other people are engaged in heavy selling, you should look for some attractive shares to purchase.
Ravi Singh, an authority on the financial markets, was quoted as saying, “If a stock is showing a return of 30 to 40 percent, then investors should exit it, and they can invest again when the stock goes down.”
Therefore, if you agree with the sentiment that the current valuation of a company is extremely high. The promoters, themselves, are actively engaged in the process of making profits through this. Therefore, you ought to likewise make an effort to make a profit from it.
