Skip to main content

Promoter activity and how it affects your investment

By tracking promoters’ move in the open market, you can get a feel of the direction of a stock price

THE January bloodbath on Dalal Street this year left stocks of many heavyweight as well as emerging companies quoting at cheap prices. What followed in the next five months was that many promoters used this slump to acquire their company’s shares from the open market. This buying from the secondary market by promoters to enhance their holdings is also known as "creeping acquisitions". You may, however, ask how it makes a difference to your portfolio. According to analysts, by tracking promoters’ move in the open market, you give yourself a chance to ascertain the direction of a stock price you are holding. Here’s an insight into how you can follow promoters’ buying and selling activity in capital markets to your advantage.

FIRST THINGS FIRST

Is it legal for promoters to shore up their stake by buying from the open market? As per Securities and Exchange Board of India (SEBI), promoters are allowed to purchase up to 5% stake in their company in a single financial year through creeping acquisition route, subject to the condition that they don’t cross the ceiling of 55%. The next question which may come to your mind is — but how can you find out promoters’ trading activity in the open market on a daily basis.

For the uninitiated, there are two ways you can do the same.

First, you can visit Sebi’s website and read insider trading disclosures page under Sebi (Prohibition of Insider Trading) Regulations, 1992.

Second, you can regularly keep a tab on the ‘Insider Trading’ column, generally published in financial newspapers with stock market prices. Investors who are not efficient with the online medium find the latter approach more convenient to deal with.

FIGURE OUT MOTIVE

Analysts believe that promoters’ trading pattern in the open market signals their intent towards their future plans. Basically, when promoters sell their share in the secondary market, it is seen as a bearish indication, unless this may not be the case, when they are selling shares to a large or strategic investor or they are doing the same to subscribe to warrants or bonds. Further, if they sell the shares for their own personal diversification, it cannot be viewed as a negative indication.
If the selling activity, however, has a correlation with the projected performance of the company, you should better watch out and take your call whether you want to remain invested in the stock. During the last two years, there have been many instances when promoters’ move to sell their stocks in the secondary market has resulted in their company’s stock prices collapsing on Dalal Street.

However, promoters generally buy their shares from the secondary market via a buyback, which is mandated by Sebi. The buyback can be done either through a tender offer or a market buyback. The company then has to fix the quantity of shares that it wants to buy from the secondary market and inform the market regulator. Under a tender buyback, the company will send you a tender form, which you will have to fill up and send it across to the company. The other option involves companies buying back shares from the open market over an extended period of time.

In India, the multinational companies, in most cases, buy through a tender route. The attempt largely remains to return excess cash to the shareholders or in a few cases, to break the flow of the falling stock prices or arrest the fall in stock prices. You should try to figure out the intention of promoters behind any move in the open market. For instance, if the promoters are buying shares in large quantities, it normally augurs well for the stock prices, and the positive impact is visible over a period of six to 18 months. The buying more often than not indicates that the promoters feel that the stock price of their companies is lower than the true value.

Day traders, generally, get more excited when they see any activity from promoters in the secondary market. For a long-term investor, if a promoter is on a fast creeping acquisition spree, raising his stake from an already comfortable level, it can be seen as a positive indication. You should, however, keep other factors in mind while taking the final call. The fast-paced approach, according to analysts, in a way reflects management’s confidence about the future prospects of a company.

In the last few months, companies which have seen mopping up of shares by their promoters from the secondary market include ACC, GE Shipping, Pantaloon Retail, Reliance Infrastructure, Great Offshore, and Reliance Energy. You should, however, try to ignore any small buying or selling promoters are doing, unless they form a pattern.

Popular posts from this blog

All about "Derivatives"

What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments. These are some of the major developments in the markets last few month: A) Global On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets. China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European ...

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now