Promoters holding and its importance

Posted by : Avneet Dhamija | Mon Jul 18 2022

Promoters holding and its importance

One of the most crucial things to look into when investing in shares is the management and promoters of the business. The company can achieve new heights with effective management and trustworthy promoters, as well as consistently increasing shareholder value.

Who is a Promoter? 

A corporate promoter is a person or business that has completed the initial steps in forming the corporation. During the company’s creation phase, they advertise, incorporate, float, and recruit investors to make investments. Promoters frequently also have a role in how the business runs on a daily basis. Promoters might be inside corporate personnel or even outside people or businesses. They typically hold stock in the business as well.

Promoter Holding

Investors are a part of a firm. A private limited business may have domestic and foreign investors as well as promoters. In addition to the investors described above, a public limited corporation may also include retail investors. The Promoter’s Stake of Promoters Holding refers to the shares that a promoter owns.

For instance, In the case of Tata Consultancy Services (TCS), promoters own 72.30 percent of the company’s shares. ITC Ltd., on the other hand, has no promoters’ share.

Why is Promoter Holding Important for Retail Investors?

Promoters are active in a company’s daily activities. They are therefore fully aware of its potential for future expansion or any challenges. Any changes to their ownership reveal a lot about the business.

Increasing promoter stake, for instance, indicates that the promoters have confidence in the company’s future. Anyone would only think about investing, it goes without saying, if the firm had tremendous potential and has the ability to generate big profits in the future. Additionally, this is true for promoter holding.

It is often regarded as a favourable indication for the stock if they are acquiring firm shares. On the other hand, a decline in promoter holdings sends a bad message to investors.

Should I purchase shares of companies with a bigger promoter holding stock percentage?

Companies with significant promoter stock holdings are typically thought to be safer to invest in than those with comparatively lesser stakes. The logic is straightforward. A firm has a good chance of succeeding in the future if its promoters believe that its shares are worth purchasing.

Investors, on the other hand, typically have a negative viewpoint on a firm with a low promoter stake. Promoter stakes indicate the money that they have put in the firm, but it’s vital to keep in mind that these figures may not always give the accurate picture. For example, Promoter holdings in Steel Authority of India (SAIL) are about 65 %. However, its CAGR returns have been negative during the past ten years.

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Trends in Promoters Holding

Consider that XYZ Limited has a promoter ownership of 30%, which is smaller than the majority of other businesses in its industry. However, the stake was 28% in the most recent quarter and 25% in the one quarter before. There is evidence of increasing promoter interest in the firm as a result. The viewpoint has changed now. Despite the modest promoter holdings percentage, the rising trend may signal a positive development for the business, making it a suitable investment.

Let’s imagine, however, that a company’s existing promoter share is 60%. For the aforementioned company, this is higher above the industry average. However, it was 64% in the previous quarter and 68% in the quarter before that. This can indicate an approaching concern.

Therefore, a clear picture of the predicted performance of the company may not be provided by simply examining the promoter ownership percentages. A simple glance at the trajectory of holdings growth or decline might provide a clearer insight.

So, should investors consider the promoter holdings trend? Does a rising trend indicate a sensible investment and a falling trend the opposite? No, not always.

Some Exceptions to the Rule

 Promoters may occasionally sell their shares to cover additional costs. Promoters occasionally sell their shares in order to recover some money for investing in new businesses. Therefore, if you notice a declining trend, try to identify what is causing it. A warning sign can be any unexplainable decrease in promoter holding.

Investors must also keep in mind that if a firm has a large percentage of domestic and foreign investment but a low promoter stake, it may be a desirable company to invest in.

ITC Limited is a prime illustration of this. It has 0% promoter ownership but a significant amount of domestic and foreign capital. It has been maintaining an attractive Return on Equity (ROE) of 24.39% over the past 3 years.

The quantity of shares pledged by the promoters is the last thing you need to look at. Even if this isn’t always a bad thing, it’s still a good idea to research the company’s finances before investing.

Summing Up

Promoter holding is a great way to supplement your fundamental analysis procedure. The future potential of the company can be examined as part of the entire investment plan, even though it shouldn’t be utilised as a stand-alone tool to research equities.

Stock investments are recognised to be risky. It will be beneficial if you first understand the fundamentals of investing if you are new to the stock market. As an alternative, you can speak with a qualified investment advisor who can assist you in creating a stock portfolio that matches your investing objectives and risk tolerance.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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