Promoters refer to people or organizations who are directly involved in running a company. Generally promoters are the owners or the founders of a company who own a majority stake and are the key members in running the business. They are generally the ones taking important managerial decisions in the company. In a nutshell, these are the people who know all the details about the internal working of the company.
Promoter shareholding refers to the stake which the promoter (or promoters) own in a company. A promoter owning a big stake in the company is great for investors because it means that the promoter has faith that the company will do well in the future. Generally this will be the highest stake in a company because promoters would want to stay in control of the company. This is a key parameter which every investor should track constantly before making any investment decision.
Why is promoter shareholding important to track?
A strong promoter shareholding gives a clear indication to the investors that the promoters are looking for the long-term growth of the business. Promoters are the ones who know the internal workings of the company and will be the first ones to know about any new developments for the business (for better or worse). Since they have a big stake tied to the company, they are the ones who will be affected the most by the fact that the business is doing well or performing poorly. Which is exactly why it is important to track the promoter shareholding to understand the health of the business.
If you want to know about the situation of a company, there is nobody else better to tell that other than the company promoters (by understand the promoter shareholding). Please note that directly engaging with the company promoters and getting information which is not public is strictly prohibited under the guidelines from SEBI as a prohibition to insider trading.
How to check promoter shareholding?
As per the SEBI guidelines, all companies are required to disclose their shareholdings regularly to the public. This provides an opportunity for all investors to monitor the shareholding pattern of the company regularly.
Are you wondering how to find out about promoter shareholding? The shareholding pattern can be easily checked using the Tickertape application.
Enter the name of the stock to be analyzed.
Go to the Holdings tab
Go to the shareholding pattern. The promoter shareholding can be seen on the top.
To get the access to Tickertape application, visit this link!
What are pledged shares?
Pledged shares are the shares which the promoters of the company have provided as collateral to take up loans for the company. This is very similar to an individual who has to pledge gold as collateral to take up a gold loan. Companies which require capital for their business have an option to pledge their shares as collateral to get loans.
Investors need to be aware of the fact that a high percentage of pledged shares is a clear sign that the company is debt-ridden. Too much debt is bad for companies just like it is bad for individuals. This information can also be checked using the Tickertape app in the shareholding pattern.
Is rising promoter shareholding always good?
Increase in promoter shareholding is almost always considered a positive amongst investors. Promoters who are buying the shares of their own company signal to their investors that the company will perform well in the future.
If you own a business which is profitable and can generate even more profits into the future, then you would like to reinvest into that business as much as possible. This is what promoters do when they increase their stake in the company. This happens before some good developments are about to happen for the company. If a stock which you own regularly sees promoters increasing their own stake, then it is a great sign for the future of the company.
Sometimes promoters will unpledge their shares by paying off the loans. This is also a great sign for the investors that the company promoters are getting back control over their stake in the company and reducing their debt burden.
Is falling promoter shareholding always bad?
A fall in promoter shareholding is more complicated to understand than the rise in promoter shareholding. There are multiple reasons why a promoter might be reducing their stakes in the company. The money could be used to reinvest into their own business such as opening a new factory or buying more equipment. The money could be used by the promoters for their own personal use. Or maybe the money could even be used by promoters to pay off their debts because the company is unable to generate enough profits. There could be many more reasons why promoters are reducing their stake in the company, some of which could be positive for the company (such as reinvesting into the business) and some of them could be negative for the company (such as paying off debts).
A constant reduction of promoter shareholding is always perceived as negative. This is equivalent to the promoter running away with their money because the company is not performing well. When a company is about to fail, everyone runs away with their money and promoters are often the first ones to run.
Conclusion
Promoter shareholding provides key insight into the health of the company. It should be regularly tracked by investors to understand the state of the business. Signs of increase or decrease in promoter shareholding could be indications towards a better or worse future of the company respectively.
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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