Rising promoter selling, declining buybacks. Are markets saying something?

There is a signaling theory of the stock markets. One of the things it talks about is the importance of corporate actions and the consequent signals it sends to investors. For instance, a company that increases its annual dividend could be signaling that they have sufficient cash reserves to distribute among its shareholders! A positive signal.

Effectively, investors read into the actions of a corporation and interpret what it means for their investments.

Our analysis of corporate actions has brought out some very interesting signals. Let’s take a look.

As can be seen from the chart below, promoter selling in the markets has been on a consistent spike over the past few years. Promoter selling till June 2024 (only half the calendar year) is almost equal to the entire 2023 promoter selling level.

On the other hand, curiously, the level of buybacks has been on a decline. One could argue that after 2 strong years, 2024 is just seeing a cooling off - and maybe it’s true, but that is only part of the story.

Source: Prime database, Media reports Kotak Institutional Equities, chittorgarh.com

Why do we say that? This shift in behaviour becomes even more revealing when we consider the nature of buybacks. Buybacks are effectively divided into two types, as seen below.

Basically, an increase in open market buybacks would signal the management's confidence in their company’s share price and indicate that they believe their shares are undervalued.

A sharp decline in open buybacks

As indicated in the data below, it seems that promoters are increasingly preferring a tender offer compared to an open buyback.

Extending the signaling theory, one could interpret that promoters are themselves a little wary of the current frothy valuations and are preferring to lower their stakes at these elevated stock prices.

Source: sebi.gov.in, Chittorgarh.com

Supporting this interpretation further is the sharp increase in promoter selling over the past few years as seen in the chart below.

Source: BSE, NSE, Prime Database, Kotak Institutional Equities Note: *From the start of the year 2024 till the stake sale date

Now here is the thing, promoter selling is completely legal and can be interpreted in many ways.

Reasons why the promoters sell

There are a few reasons behind these sales. Some promoters might be raising funds to grow their businesses or meet minimum public shareholding requirements. Others may want to reduce debt or adjust their family holdings, especially when it comes to wealth diversification or family settlements. In some cases, it’s simply a strategic move to realign their interests.

How should investors read this?

After a promoter sells shares as can be seen from the below table, stock prices can move in either direction. That’s why investors need to focus on the company’s fundamentals before making any decisions.

Source: screener.in

To sum up, data suggests that some caution is warranted. Multiple market experts have time and again raised concerns about the current market levels and the lofty valuations. The decrease in open offer buybacks, and increased promoter selling are one indication to investors.

The underlying fundamentals of the Indian economy remain robust, that said, current valuation levels could play truant.