Is the trend of rising promoter stake in companies beneficial for investors?

One in four BSE 500 promoters have increased stake over one year

Policy Paralysis, slowdown and a lack of demand has prevented promoters from investing in growth and creating capital. Capital asset creation has been missing over the last four years, which has also been captured by various data points.

So what are the promoters doing with the profits they generate during the period. Rather than distributing them as dividend, they are doing the second best thing, buying back their company's shares from the market. This way, they benefit by increasing their stake in the company at a time when the markets are down. But there are more benefits to the common shareholders by this action, but first let's look at the numbers.

Over the last one year, promoters of 127 companies in the BSE 500 group have increased their stake, majority of them from the share buyback route and a few from subscribing to their rights issues. In fact in the last one year, as many as 77 of the BSE 500 companies have seen promoters increasing their stakes.

Apart from Kesoram (rights issue), United Spirits, CRISIL and Hindustan Unilever who have launched buyback open offer, promoter of all other companies have increased their stake by buying shares in the open market through the creeping acquisition route. Under this route, promoters can increase their shares by buying 5% from the open market. Apart from PSU's and banks, promoters from all sectors have resorted to increasing their stake.

But is this bad for the small investor. Not really. By increasing their stake, promoters are helping the common shareholders in a number of ways.

First it reflects the confidence of the promoter in their own company. If the promoter is finding current valuation to be cheap, then it should be. They are the best judge for the company's outlook.

Secondly, by buying shares from the open market, they are reducing the floating stock of the company. This means there are few suppliers of stock in the market, thus the chances of price moving higher increases.

Thirdly, the shares thus bought back from the market are generally extinguished or cancelled from the equity capital of the company. Thus equity capital of the company is reduced which increases the earnings per share of the company and thus the share price.

Irrespective of all the benefit of buying back shares, it pales in comparision to using the money to create capital assets which increases production, sales, profits and most importantly employment that results in an overall multiplier effect on the economy.

Top 10 companies which have increased promoter holding

Amtek India	9.59%
Gujarat Alkalies	8.55%
Amtek Auto	8.06%
Alstom T&D	6.92%
Adani Power	5.00%
Hindalco	4.94%
India Bulls Real Estate	4.92%
Jubilant Life	4.90%
Rolta	4.86%
Bharat Forge	4.69%