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Stockmarkets: The promoters view?

Aug 11, 2004

Often we come across data pertaining to the shareholding pattern of a company, which demarcates the holdings of various parties in the company. The various parties include the promoters, mutual funds, Foreign Institutional Investors (FIIs), public, etc. While the latter three of these fall largely in the trading category as they consistently get in and out of stocks, the promoters tend to generally adopt a more longish view towards their company. After all, they know best about their company (or sometimes even when the chips are down, the promoters don't have a choice). Promoters, who could also act in the capacity of directors and other senior executives of the company, are one category of investors that have the potential to beat the best analysts of the world. By virtue of the fact that these are the people who are in constant touch with the day-to-day operations of the company, they are relatively in a better position compared to any other analyst and/or investor to identify a trend. The demand-supply dynamics of the industry, the cyclical trends, the internal measures being undertaken to improve the operating performance and any other key issue related to the survival and growth of the business, are all information over which the promoters have a first hand view.

Before we proceed further, in the backdrop of the above, let us first find out, of the BSE-100, which companies have seen promoters increase their stake in the company during the June quarter over the previous quarter and who have pared the same.

The top 5...
Hiked Pared
Hindalco Infosys
Reliance Energy IPCL
MRF Ltd. Gujarat Ambuja
Chambal Fertilisers Asian Paints
United Phosphorus Satyam Computers

If we further get into the details of the above table, while there was a hike of about 5.8% in the equity base of Reliance Energy, in the case of other companies where promoters hiked stakes, there was no change in equity base. Further, it must be noted that during the quarter (April-June 2004) the stock price of companies like Hindalco, Reliance Energy and MRF had witnessed a significant correction, thus seemingly providing an opportunity to promoters to increase their holding in the company.

On the other hand, if we consider the companies wherein the promoter stakes were pared, in some cases like that of Gujarat Ambuja, this could be attributed to the 7.8% hike in the equity base of the company while the promoters increased theirs by merely 0.3%. In the case of others, there was largely no change in their equity base, thus indicating that the promoters actually reduced their holding in the company. It must be noted here that the stock price of Infosys and Satyam had actually gained during the quarter, at a time when the BSE-Sensex headed lower by over 14%.

Further, one trend that has emerged, from the data culled out of the shareholding pattern of the BSE-100 companies over the last 5 quarters, is that more than 1/3rd of these companies saw their promoters holding witness a decline when the stock markets were on fire, having gained 100% in the last eight months of 2003. However, it must be noted that it is not necessary that the fall in promoter holding is only because of open market selling by promoters. There could be various other reasons like conversion of previously issued debentures and warrants, preferential allotment, employee stock options conversion, etc.

So, should the promoters' action with respect to the holding in their company be considered a good indication of things to come? In a way, this method does give us an overview on what the management is thinking, but it is definitely not a foolproof way of making investments in the stock markets.

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