When a senior member of a company’s management sells his shares, investors are scared. And when the member shares all his shares, investors tremble. Something similar must have happened to the investors of Bharti Airtel whose CEO and Joint MD Manoj Kohli sold his entire stake in the company in the middle of last week.

Source: Trend

Mr. Kohli sold shares worth Rs 75 m and the same represented just around 0.006% of Bharti’s entire shareholding. However given his stature within the organisation and confusion regarding the reason for such a sale, investors dumped Bharti’s shares to an extent that its market capitalisation fell by a whopping Rs 75,000 m!

While the stock has recovered almost 70% of the post stake sale loss, the important questions to ask is - should investors panic when promoters/management sell their personal stakes in the companies they are running? Secondly, should the panic be to such an extent that if a promoter sells 1 share, the minority investors dump 1,000 (as per the ratio of 75 : 75,000)?

We believe that in a ‘post-Satyam’ world, investors are very right in getting disturbed by such unforeseen events. The way they have been treated by promoters of companies like Satyam, Sterlite, Ranbaxy, and the erstwhile Reliance Energy, the knee jerk reaction is inevitable. Promoters and managements, apart from playing the key role in guiding companies to strong and sustainable growth are also looked upon by minority investors as the safe-keepers of their trust. And if the trust is shaken a bit, especially in ominous times like these, investors lose their confidence which then takes a long time to return.

Source: BSE

The argument contradicting this point of shareholder panic is that it is important for the shareholders to view these actions from promoters/managements (of selling stakes) while taking their overall view of the promoters/managements into account. Infosys’ founding promoters, for instance, had gradually reduced their shareholding in the company during March 2001 to March 2007, but investors did not question them for reasons well documented.

Simply put, a reaction to such announcements must be seen in conjunction to your overall faith in the promoters/managements. If you believe in them given the way they have guided the company over years and have been ethical in the handling of business practices and its assets all these years, maybe you need to give them time to explain the rationale for selling their stakes, part or full, whenever they do so.

In Bharti’s case, we believe, the problem lied in their communication more than anything else. The company’s Chairman, Mr. Sunil Mittal, however tried to undo the damages just a day after news of Mr. Kohli’s stake sale hit the markets. He indicated that the CEO had taken prior approval before selling his shares which he had received by way of employee stock options (ESOPs).

In his communication to the company’s major investors, Mr. Mittal wrote, "The purpose of ESOPs is to use them for creating family assets and not storing them. From time to time, all senior leaders have sold shares to build assets and enjoy the fruits of their hard labour."

As was quoted in The Economic Times, Mr. Mittal also added that the company has created exceptional wealth opportunities for its key management leaders and that Mr. Kohli has many more stock options, vested and unvested, which he would exercise and enjoy in due course.

As a matter of fact, while Mr. Kohli disclosed that he sold these shares for personal reasons, investors would do well to note that he still holds 180,000 stock options in the company and continues to be its CEO and Joint MD. This is what he had to say clarifying his stake sale - "I am a middle-class guy. The sale is for a personal reason and only my wife can interfere in such decisions." We believe your words, Mr. Kohli!