Bull run effect: Promoters raise ₹62,000 crore via stake sales, highest since 2019

While promoters tend to go on an encashment spree during a bull run, this time most of them have sold their stakes at significant discounts to the previous day’s closing price.

In the biggest block deal, IndiGo co-founder Rakesh Gangwal sold a 5.8% stake in the airline’s parent InterGlobe Aviation Ltd for ₹6,785.7 crore in March. It was followed by Mphasis Ltd's promoter selling shares worth ₹6,736 crore, and Bharti Airtel’s foreign promoter Pastel selling a stake worth ₹5,849 crore.

Also Read: Reverse mergers gain ground on the expressway to public markets

The benchmark Nifty 50 has surged 10.5% in 2024 so far, registering an all-time high of 24,036.60 points on Thursday.

The reasons driving the trend

Though attractive returns are one the key reasons for company managements that have only been investing in their business for liquidating stakes, a promoter may choose to sell shares for various reasons, including personal debt reduction, portfolio diversification, strategic treasury management, liquidity requirements, said Varun Saboo, head of equities at Anand Rathi Shares and Stock Brokers Ltd.

He added that these reasons are not concerning in a bull market.

Long-term promoters, who have invested heavily in their businesses, may also sell for philanthropic reasons.

“While such sales might make investors nervous, viewing them as a lack of promoter confidence, these sales are not always negative and could continue with good valuations," said Satish Menon, executive director at Geojit Financial Services.

Also Read: Will markets' focus turn to earnings, finally?

The transaction can indicate that the company is healthy, evident from the recent sales to long-term investors boosting holdings of foreign and domestic institutional investors, which bodes well for long-term growth, he added.

Additionally, selling stakes now, with anticipated lower interest rates, could benefit buyers like mutual funds by offering potential gains from expected rate cuts in the near term.

All said, the stake sales must be understood in alignment with the intentions of the promoters, said a deal valuation expert on the condition of anonymity.

For instance, if a promoter is a private equity (PE) player, they typically aim to divest within 5-7 years as per their fund's strategy. A notable example is Mphasis Ltd, where Blackstone Inc. sold its stake, achieving a 5X return over eight years, he said.

Blackstone sold 28.5 million shares, amounting to a 15.1% stake, in Mphasis through a bulk deal for ₹6,735.6 crore on 10 June.

It's discount season

In February, promoters of Whirlpool and Vedanta sold shares to raise money to repay debt. However, the discount was below 5% in Whirlpool.

Block deals signed at a discount of 5% or above to the deal price include names like Happiest Minds Technologies Ltd, Vedanta Ltd, Coffee Day Enterprises Ltd and IRB Infrastructure Developers Ltd.

 

The sharp discount can be attributed to selling a significant chunk through bulk or block deals in a single day. Buyers in such scenarios typically seek a better deal, considering that they could alternatively purchase shares from the open market. The discount reflects the promoter's willingness to bear impact costs of a swift sale versus potentially losing out on the gains by selling shares gradually over time.

Also Read: Promoters trim nearly $7 billion in share pledges riding buoyant equity markets

“These sales can cause short-term volatility and declines in stock prices, but they might also present opportunities for new investors to buy at lower prices," said Siddhesh Mehta, research analyst, SAMCO Securities, adding that frequent and significant promoter sales could also erode investor confidence.

However, this should not be essentially contemplated as a negative investment case for the company, especially when long-term outlook remains promising, said Binod Modi, portfolio manager, Sharekhan PMS. “Reduction in promoters’ stakes can also be prompted by factors like listing compliant norms, reduction in debt (as in case of Vedanta) and making room for strategic investments."

Modi sees this trend continuing given the sustained rally in the markets and red-hot valuations of many mid- and small-cap stocks.

The Midcap 100 is trading at 40.98 times, higher than its five-year average price-to-earnings multiple of 35.98. Even the Nifty Smallcap index is trading at 33.13, which is significantly above its five-year average multiple of 28.18 times, showed Bloomberg.