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.
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.
