The tussle between a promoter and the board of a company is not new in the Indian market. In 2015, the discord between Rahul Yadav and the board of Housing.com and the current conflict between Ashneer Grover and BhatarPe’s board stand testament to such instances. While the outcome of such tussles may vary, they can cause some anxious moments for the shareholders and investors of the company.
One of the most important aspects in understanding the impact of such incidents is the stake of the promoter in the company. In this article, we will talk about promoter stakes and their relevance to investors and shareholders.
To understand promoter stake, let’s look at who is a promoter.
A promoter is a functional role more than a legal designation. A promoter is someone who is either involved in establishing a company and/or has control over how it functions. Promoters can be employees or external individuals or organizations. Also, they may/may not have a stake in the company.
A company has investors. A private limited company can have promoters, domestic investors, and international investors. A public limited company can have retail investors in addition to the abovementioned investors. The shares held by a promoter are known as the Promoter’s Stake or Promoter’s Holding.
For instance, the shareholding pattern of Reliance Industries has 50.6% of shared held by promoters. On the other hand, HDFC Ltd, has no promoters’ stake.
So, which one is a better company for shareholders?
One thing that investors must keep in mind is that promoters can play an important role in the success and growth of a company. They usually invest in the company and can also hold executive positions. Hence, it is important to pay attention to the stakes held by promoters before deciding to invest in the company.
Typically, companies with high promoter holding stocks are considered to be safer to invest, compared to those with relatively lower stakes. The reasoning is simple. If the promoters of a company think that its stocks are worth buying, then the possibility of the company doing well in the future is high.
On the other hand, a company with a low promoter stake is usually looked upon cynically by investors.
However, it is important to remember that while promoter stakes highlight the money invested by them in the company, these numbers might not always paint the right picture. Steel Authority of India (SAIL) has a promoter holding of around 65%. However, over the last 10 years, its CAGR returns have been negative.
Also, read Types of stock promoters
Let’s say that ABC Limited has a promoter stake of 22% which is lower than most other companies in its domain. However, the stake was 18% in the last quarter and 15% in the quarter before that. Therefore, there is an indication of growing promoter interest in the company. Now, the perspective changes. Despite the low percentage of promoter holding, the increasing trend can indicate a healthy sign for the company, making it a good buy.
On the other hand, let’s say that the current promoter stake of a company is 70%. This is higher than the industry average for the said company. However, it was 75% last quarter and 80% in the quarter preceding that. This can be a sign of an upcoming problem.
Therefore, merely looking at the promoter stake percentages might not offer a clear picture of the expected performance of the company. A quick look at the trend of increase or decrease in holdings can offer a clearer picture.
So, should investors look at the trend in promoter holdings? Does an increasing trend highlight a good investment and a decreasing trend otherwise? Not necessarily.
Sometimes, promoters might sell their shares for other expenses. A good example of this is the recent sale of promoter shares by Jeff Bezos for investing in a new company. Hence, if you spot a decreasing trend, then try to find out the reason behind it. Any unexplained decline in promoter holding can be a red flag.
Another factor that investors must keep in mind is that if a company has a low promoter stake but a higher percentage of domestic and international investment, then it can be a good company for investment.
HDFC Limited is a classic example of this. It has 0% promoter holdings but a high percentage of domestic and international investments. Its stock price had jumped from around Rs. 1400 in 2017 to around Rs. 3000 in November 2021.
The last thing that you need to check is the number of shares pledged by promoters. While this is not always as a negative sign, it is better to check the company’s financials before investing.