What is the role of promoter holding in stock analysis...should we give importance to it or not?

Investment Learning
1

Hi Gurus,

On valuepickr, i have seen many companies discussed where the promoter holding is less than 51% and many shares are pledged.

As an ideal investment suggested in many books, the ideal promoter holding should be > 51% and no pledged shares.

Please suggest what is right, we should invest in the companies where promoter holding < 51% and have pledged shares as well or not?

Thanks
Mahesh

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2

This seems to be a very subjective question to me.

Promoter holding is important but it does not prove to directly impact the company.

I personally feels one should see the pattern over last few quarters and years. If promoters are increasing thier share holding its a good sign (proves they are optimistic about future).

Regarding selling of shares , it depends on the amount of shares which is sold. One may need to sell the stock for thier personal reasons also. So one should see the proportion of the shares sold to the total share holding. then should make a logical decision. Example can be Selling of Shares by Kaveri seed promoters when they diluted last year around 7% stake.

Regarding Pledging of shares I stay away from the companies whose promoters pledge more than 25-30% of shares because even if pomoters have good intentions of paying back the loans and repay shares , there is always a risk of selling of shares by the lenders which can drastically reduce the share values and can lead to share price crash…

3

should we include the minimum shareholding > 51% in our analysis and pledged shares = 0%

4

Hi Mahesh,

Very pertinent question. have not come across much of artifact on this topic which can answer this directly. Therefore, am taking a stab just basis my logical thinking.

To me this indicator (just like couple of other business ratio,metric etc.) may not paint the complete picture and thus needs to be looked at with context and background.

Why? well, approx 1600 out of ~3800 listed entities (for which I have a summary data) are the one where promoter holding is <50%. Some of the real good businesses like Yes bank, Ashoka Leyland, Bajaj auto, Dr Reddy’s lab etc. are the one where you will find promo holding below 50%.

However, at the cost of sounding contradictory, I also believe that promoter holding should be baked into the investment decision. So, In my thinking…

  1. This needs to be looked into the context of the industry that i am interested into. Is the company of my interest is within the reasonable range as compared to industry players.
  2. Rather than standalone promoter holding, I think I will focus on more of Promoter holding + Institutional holding.
  3. Pledge percentage as a component of promoter holding.
  4. Trend over time. Is the holding coming down consistently. or some patter in institutional holding/pledge etc.
  5. Change in Institutional holding over time. Recently something that caught my attention was institution taking 42.19% in Shriram EPC (link). With that public holding on this counter will be less than 7.44. (though 30% pledge could be concerning).

Thanks,
T@run

6

This is very important topic and thread especially the kind of bull market we are in. Unfortunately not discussed on this thread and so not able to get answers to most of questions I have hence reviving the discussion on topic.

Of course, promoter holding is subjective things like many other factors in investing. However, it can give some important clues and can be serve as one of the important factors in analyzing companies.

Request fellow senior and veteran VP members to answer some or all of following questions:

Q1. What could be ideal promoter holdings % should we look in a firm (excluding firm in which promoter holding is restricted due to regulation)?

Q2. How should we read general public holdings? The higher the better or the lower the better?

Q3. How should we read institutional holdings? The higher the better or the lower the better? Should we see it in conjunction with promoter holding?

Q4. What should be duration to check Change in Promoter holding (increase/decrease both)? 1 year? 3 year? Does 5 years makes sense as things could be already factored in? What % of change (decrease) should make us wary about promoters?

7

friends,
any idea where to get/track promoter pledge decreasing status?
Regards,
Prasad.

8

Promoter holding is very essential element for Stock analysis. Following steps to be applied

  1. Check shareholding information on trendlyne or BSE and see whether promoter stake is increasing or decreasing
  2. If Promoter stake is increasing it means promoters have confidence in the company for the future viablity of the company.
  3. If promoter holding decreases check whether the shares are transfereed to FII or DII or its ofloaded to public. If its of loaded in public its a sign of worries in the company and promoters are not confident in running and creating wealth for shareholders
  4. Never invest in company where pledge increases or its more than 15%
  5. Generally pledge increases as value of collateral security decreases and to cover the defecit it requires more amt of shares to be pledged
    so please check these parameters strictly before investing
9

@Prasad_India

http://www.bajaar.me/screen has an option Changes in quarterly ownership that screens for stocks with increasing/decreasing promoter holdings or pledging.

http://www.bajaar.me/stocks shows historical promoter holdings along with large public holdings (>1 %) for individual stocks.

10

Hi Vimal,
Where did you see promoter pledge decrease in bajaar.me.
Is it in the screener? I got it.
Thanks.
Prasad.

11

Yes, under screener.

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Just for info: Courtesy; promoter holdings: Watch these 50 stocks: Promoters are gung-ho about their businesses - The Economic Times

13

There was a very nice webinar from Unifi capital on changing promoter stake and its implication on business/valuation. They even have a fund employing this strategy.

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I see a company Danube Industries promoters is aggressively buying from open market .Anyone tracking ?