What is Promoter's holding and its significance?
We hear about promoter holdings often when it comes to the stock market, and it really is an important term. But what does it mean? What is its significance? Let’s find out in this article.
Let’s start off by breaking down the term. So, what does promoter mean?
A promoter of a company is anyone who is deeply involved in building the company and has influence over its functioning. They may have a varying stake in the company and may hold senior positions in the company.
Okay so now, what does promoter holding mean?
Now, apart from promoters, a company can also have domestic investors as well as international investors. If the company is listed, retail investors like us, also have a share in the company.
If you’re wondering what the significance of this term is, here it is.
Promoter’s holding, apart from telling us about the split of the pie in terms of who owns how much, also tells us about the mindset of the promoters.
How? Imagine a situation in which you see buying happening by the promoters of a company, i.e. the promoter holding increases.
What does this signify? It shows that the company’s promoters think it is worth buying shares of this company. That the company is expected to do well in the future. That the promoters have faith in the progress of the company.
With this in mind, a higher promoter holding is considered a positive for the company. This shows the overall strength of the company and signals to retail investors that the company can be considered as a good buy.
Let’s take Reliance Industries as an example again. Its promoter holding has increased from 47.27% in Mar 2019 to 50.07% in Mar 2020. This gives investors’ confidence to invest in the company.
Now imagine a situation in which the promoter holding decreases.
A decreasing promoter holding, in contrast, sends a negative signal to investors, showing that the promoters themselves don’t believe in the future of the company.
Specially considering the involvement of promoters in the day-to-day functioning of the company it can be an alarming factor for investors.
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But here’s the flip side, promoter holding decreasing is not necessarily always a bad sign.
There are times when the promoters want to liquidate their holdings for their personal expenses or like Jeff Bezos, they may need to liquidate for investing in a new company.
Therefore, the key is to know the reason for the liquidation of the share. If there’s a good reason for it there’s no need to worry.
However, unexplained decrease in promoter holding can be a red flag.
Okay now additionally, something else that needs to be kept in mind is the domestic investment and the foreign investment in the company.
A company having a lower promoter holding but a high domestic and foreign institutional investment is also considered to be a healthy sign.
Something else to keep in mind is that a company may have low promoter holding but increasing gradually. This can be a good sign for a growing company and may be worth investing in.
Another interesting factor to keep in mind is that promoter shares can be pledged as well.
Now what does that mean?
Think about it as a loan you take. Let’s say you need to take a loan to buy a new house. In this case, you need to put some of your assets as collateral to borrow the money.
Much in the same way, when promoters want to raise money for the company or for themselves, one of the ways that they can do that is by using their share in the company as collateral for getting a loan from a bank.
This is termed as pledging of shares.
To understand a little more about the financials of how it works, when a shareholder pledges their shares, the amount of loan that a bank gives is usually of 50% -60% of the value of the market price of the share.
Let’s say, for the sake of simplicity, the company wants a loan for an amount of 10,000 Rs and one share costs 1000 Rs, the promoters will need to pledge 20 shares (at the rate of Rs 500 per share x 20 shares = Rs 10,000).
The difference between the market price of the shares and the loan amount is kept by the bank to safeguard themselves from the volatility in the share price. If the company is unable to pay the loan amount, the bank holds the right to sell the shares in the market to maintain the margin.
How does this affect a shareholder?
Pledging of shares is not necessarily a negative. It is a common practice in order to raise money. It just goes to show that the company does not have enough financials that are required and have to pledge shares for the purpose of the loan. However, sometimes promoters can use this to get rid of their shares at a higher price if they expect a sharp fall in the share prices in the future.
So how do you find the promoter holding of a company?
The official websites of the Bombay Stock Exchange and the National Stock Exchange has the promoter holding for listed companies available for anyone to see. You can also check the promoters' holding at ICICIdirect.com
After searching for the desired company, under ‘company profile, one can get the details of the promoter holding.
Conclusion: The promoter holding alone cannot predict or determine the investment as good or bad. However, it is surely one of the factors that contributes to understanding whether a company is worth investing in or not.
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So, let’s recap what we covered:
- Promoter holding is the share of the company that is owned by the promoters within the company.
- Promoter holding may be increasing or decreasing and both have their respective implications on how they make the company look from an investing lens.
- Often, promoter holding increasing or decreasing is a more important indicator as compared to the actual promoter holding itself.
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