I often ask this to the delegates in my Investing Workshop at FLAME Investment Lab, Pune, ‘Why did this specific guy win out of 456 players?

Even though more than half of the people have already seen this crazy Korean show called Squid Game (Season 1), surprisingly, I have never gotten the correct answer.

Most say he was smart, strategic in planning, a team player, and lucky, among other things. Meanwhile, I wonder if they have even seen the show?

The real reason is that the old fella, who was playing in his team, was the mastermind behind the game. As an insider, he knew what kind of challenges would come in each round, so his team was always well prepared.

When it comes to investing, what if we could have the promoter on our side? As an insider, a promoter is the closest to the business; they are in the driving seat and know much more about the expected business trajectory versus what a minority investor can figure out by looking at the financials of the last quarter or year.

Amongst a host of filters, we often use ‘promoter buying’ as one of the criteria to create a short list of newer ideas to study. At other times, while we are already studying something and see the promoter buying too, it adds to our conviction.

As per the Indian Capital Market Regulations, the company must report to the Stock Exchange if the promoter has bought any shares in the company. Think about it – the promoter has a choice to put their money anywhere. Still, if they choose to put it in the company, it indicates that their assessment of the intrinsic value is higher than the quoted price. Perhaps, they expect the two to converge, driven by some catalysts, be it earnings growth or some corporate action. Doesn’t mean it will always play out, but it’s a good leading indicator nevertheless.

This mainly works well in cyclical businesses. Promoter buying adds to the conviction that the worst of the down cycle could be behind us with better days ahead. It’s a much stronger signal if we see insiders (employees) & promoters buying across multiple companies in a specific sector.

The big question: Is Converse True? – If promoter buying is positive, is promoter selling always negative?

While the reason to buy is only one (as shared above), the reasons to reduce ownership in a company can be plenty. As counterintuitive as it may sound, most of them have nothing to do with the company’s future potential. A promoter could sell to:

1. Reduce concentration risk for the promoter family; in many cases, the entire net worth could be tied to the listed entity
2. Fund another venture which is unrelated to the business of the listed company
3. Fund a significant expense like buying a real estate for the family
4. Conclude a family settlement where one of the siblings / next generation is not interested in continuing in the current structure
5. Fund philanthropic ambitions
6. Set up a family office to fund innovative startups or invest in other listed businesses
7. There can be tens of other legitimate reasons why a promoter wants to liquidate some shares..!

Successful promoters end up creating a lot of net worth on paper, but to access their wealth, they need to liquidate a portion of it. If we think about it pragmatically, and not as minority shareholders, there is nothing wrong with it. In the US, promoters typically hold a 5-10-20% stake in their company, whereas it is substantially higher in India (~50%). While SEBI allows a maximum promoter holding of 75%, we should not benchmark anything less than 75% as a deal breaker. Even if the promoter holds a 40% or 50% stake, it remains substantial and likely the most significant component of their net worth.

Page Industries

Page Industries is a company which has the license to manufacture & sell Jockey-branded inner-wear in India. Until 2007, its promoters, the Genomal family of Bangalore, held a 97% stake, which was reduced to 72% following an offer-for-sale during the IPO. Subsequently, they kept bringing it down; probably, there was no year when they did not trim it. Today it stands at a little under 43%.

I know a few investors who loved the opportunity because it passed all their quality filters, but they just couldn’t digest this one bit—why is the promoter family trimming their stake? Accordingly, they could never participate in it. What happened to the stock? It moved up 100 times within 10 years of its listing. It just followed earnings per share; the stock did not care whether the promoter owned 72%, 62% or 52%.

Usha Martin

Usha Martin is another interesting example. The company was emerging from a significant restructuring exercise, having sold its steel mill to Tata Steel to focus on its core business of wire ropes. This one corporate action in 2020 could restore its lost glory; it was again a debt-free company with 20% RoCE, market leadership, and reasonably strong growth, all available at a throw-away valuation. There was just one catch – the promoter was reducing the stake. Why? One of the second generation had settled in the UK and wanted to gradually cash out to fund his ambitions outside the listed company.

We hunt for unique ideas and are often amongst the first few institutions in most stocks we own. Usha has also been one such name. Over the years, in our discussions with fellow investors & fund managers, the question regarding promoter selling would invariably pop up and often be the end of the debate.

What happened to Usha’s stock price? At 30x, it has been one of the best-performing stocks over the last five years (unrelated to the COVID crash & subsequent bounce). How come it did so well then? Because the earnings bounced back materially led by the corporate action – from loss-making to reporting sustainable earning of Rs 400 Cr a year. For Stalwart, Usha has been over 8x from our initial purchase in 2021. Stock simply did not care if one of the brothers was selling; it just followed the earnings trajectory.

There is an interesting nuance to this story. The brother selling out was classified as the promoter, but in reality, he was no longer running the company; he was not involved in any executive role or had any board seats. For all practical purposes, he was just like any other public shareholder. Whereas the brother who was designated as the Managing Director was, in fact, buying more shares from the open market. This nuanced view requires going past the negative bias immediately created when we see a net reduction in reported holdings by the group classified as ‘promoters’.

Share Pledging

Pledging is more worrying than promoter selling, but is often ignored by the investing community. When promoters pledge their shares with a lender and borrow funds against them, they essentially encash the value of their holding. However, the reported promoter holding would continue to be optically high.

What happens when they default on such loans? Lender invokes the pledge and starts dumping the shares in the open market. This results in the stock going lower circuit-to-circuit, leaving no opportunity for any minority shareholder to exit. Such stocks eventually get delisted from the exchange, and the entire investment capital is lost.

This is precisely what happened in the recent case of Gensol, wherein almost the entire shareholding of promoters was pledged with financial institutions.

The only exception to pledging not being this negative is when the promoter has offered their shares as secondary collateral for a loan taken by the company to fund its capex. This often helps a company get a lower interest rate. Important to note that:

1. This is a loan for the company and not for promoters or their holding company,
2. This is a secondary collateral and not primary, and
3. Its role is not to encash promoter holding, but to secure a lower interest rate for the benefit of the company.

Source:
This is an excerpt from Partners’ Memo H1 FY26 by Wealth Guardian Fund of Stalwart PMS. The complete memo along with prior editions can be found on the following link: https://stalwartvalue.com/investor-memos/