Why are promoters selling stakes?

The stock market is booming and  Sensex and Nifty are touching new heights. Market caps of companies are also breaking records. Seeing the great increase in valuation, the promoters of many companies are also reaping in profits by selling thier stakes.

In such a situation, the important question for common investors is what should they do?
In the quarter from April to June, the promoters of about 110 companies have sold shares worth about Rs 16,000 crore in the open market.

These include companies like HDFC AMC, Vedanta Fashions, HDFC Life, Easy Trip Planners, TD Power. Abrdn, the promoter of HDFC AMC, sold its 10.2 percent stake in the month of June for Rs 4,079 crore. At the end of June, the promoters of Easy Trip Planners sold 5.75 per cent stake in the open market.

Concern when promoters sell
Selling shares of the promoter is not considered good. When the promoters of a company start selling shares, it is believed that the promoters’ faith in the company is decreasing. They are not very sure about the future growth of the company. In such a situation, after the sale of the promoters, the price of the shares starts falling, because the common investors also start selling in it.

For example, when Clean Science promoters Asha Ashok, Neelima Krishnakumar and Asha Ashok Sikchi announced sale of some of their stake in the open market last month. The shares started falling after that.
But this is not necessarily the case with every sale. Take the example of HDFC AMC, the stock rallied nearly 35 per cent during the June quarter after a promoter sold a major stake.

In the last three months, the shares of most of the companies whose promoters have sold their shares have gone up.

Not always negative
It is not necessary that the sales of promoters should always be negative. It may also happen that the valuation of a company has become overvalued in the market and the promoters want to take advantage of this and make some profits.

Sometimes the promoters have to offload the stake to meet listing norms. According to the rule, there should be at least 25 percent public stake in a company. To follow this rule, Patanjali Foods had to bring a follow on public offer. The promoters of Clean Science also had to sell their stake for the same reason.

Many times promoters sell their stake to meet the need of additional cash and also to repay the loan. For example, in recent months, the promoters of Adani Group have raised a good amount by selling stake in their companies to American firm GQG Partners.

What should investors do?
Many experts in the stock market often advise that you should avoid getting influenced by greed or euphoria and try to go against the flow. That is, when people are buying heavily, you can increase the profit of your portfolio by selling some shares and when people are busy selling, then you should find some good shares to buy.

Market expert Ravi Singh said, “If a stock is showing a return of 30 to 40 per cent, then investors should exit it and can invest again when the stock goes down.”

So if you also think that the valuation of a company has become very high. In that, the promoters themselves are engaged in making profits. So you should also try to book profits in it.