Promoters of 55 companies increase stakes - What does it mean?

The Indian equity market has fallen 3.31% since January. The smallcap and midcap indices have also fallen between 3 to 5% since the start of the year with many companies recording a share price drop between 10% and 35% during the same period. 

Every fall brings an opportunity not only for investors but also for promoters to buy stock. Let us look at some companies in which promoters increased stakes in their companies during the recent correction.

Shareholders in a company

In a publicly listed company, the shareholders can be broadly classified into three categories:

• Institutional shareholders: These are typically large organizations such as banks, pension funds, insurance companies, and investment companies. They own a significant percentage of the company's shares, and their investment decisions are made by professional fund managers or investment advisors.
• Retail shareholders: These are individual investors who own smaller amounts of shares in the company. They may invest in the company directly by purchasing shares or indirectly through mutual funds or exchange-traded funds (ETFs).
• Promoters: Individuals involved in the business and who have a stake in its success fall in this category. It may be someone who owns part of the company or an investor who has put money into the company’s equity. Promoters holding more than 75% stake in the company have to mandatorily divest additional shares to the public to comply with SEBI rules.

Importance of promoters' stake

Promoters can play a crucial role in the success and company's growth. They invest in the company and also hold executive positions. Therefore, retail investors need to pay attention to the stakes held by promoters. 

The rule of thumb is that companies with high promoter holding are safer to invest in compared with a company with a relatively lower promoter stake. The reason is simple - if promoters think its stocks are worth buying, then the possibility of a company doing well in the future is high. A company with a low promoter stake is usually looked down by investors. 

• Increasing promoter stake: If the promoter's stake is increasing quarter on quarter, it indicates the promoter's interest in the company. Even if promoter holding is less, the increasing trend is a healthy sign for the company and shows it is a good buy.
• Decreasing promoter stake: If the promoter's stake in the company is continuously falling, it could be a sign of an upcoming problem. 

However, it is essential to mention that promoter stake percentage might not offer a clear picture of the expected company's performance. 

Promoters increasing stake since January 2023

As per the reports, promoters of 55 companies have bought shares of their companies from the open market since January. One of the reasons for it is the falling share price. In the past two months, companies like UPL, HCL Tech, Bajaj Holding, Quess Corp, Jindal Saw, and others saw promoters' purchases in this period. Let us look at companies in which promoters have increased stake:

The highest buying by promoters was in UPL - they bought shares worth Rs 530.86 crore. HCL Technologies and Aarti Pharmalabs have bought shares worth Rs 198.73 crore and Rs 47.34 crore, respectively. Companies like Quess Corp, Wheels India, Welspun Corp, Bliss GVS Pharma, and Confidence Petroleum have fallen more than 10%, and promoters in all these companies have increased their stake by buying shares from the open market. 

Impact of rising promoter stake

Increasing a promoter's stake tells that the group of people who founded or have a significant interest in a company is buying more shares in the company. It can be seen as a positive sign, as it shows that the promoters have confidence in the company's future prospects and believe that the stock is undervalued.

It is worth noting that an increase in a promoter's stake does not always mean positive things. In some cases, a promoter may increase their stake to gain more control over the company or prevent a hostile takeover. 

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.