Decrease in promoter stake beneficial for business longevity, believes Edelweiss' Rashesh Shah

Rashesh Shah, Chairman, Edelweiss Group

Bigwigs of India Inc have capitalised on the bull run in the equity market over the past couple of years to cut down their stakes, a trend that typically raises alarms about a peaking market and has left many investors uneasy. For Rashesh Shah, co-founder of Edelweiss Group, however, it is a beneficial change.

Speaking on the sidelines of Moneycontrol's Markets ki Dhadkan event, Shah noted the high level of promoter ownership in Indian companies compared to global averages and argued that decreasing these stakes is beneficial for fostering institutional ownership and governance. "If promoters owned 80 percent or 75 percent of all companies, I don’t think the participation would be as broad," Shah said.

This change in ownership pattern coincides with the time when Indian investors are striking a balance in their savings between banks and capital markets. More and more savings money is making way into equities through mutual funds.

"India had a habit of saving but did not have the habit of investing. This investing habit is valuable, but it also requires companies to become more institutionalised," Shah stated.

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Citing examples of companies like Infosys and HDFC Bank , Shah highlighted their evolution from being merely promoter-led entities to now serving as institutional allies. This trend also stands true for other firms such as ICICI and Larsen & Toubro.

Furthering his point, Shah remarked that as companies expand and markets grow, some distribution of ownership becomes necessary, fostering institutionalisation and stronger governance.

"Consequently, these companies are held by both retail and institutional investors, which enhances their longevity, moving away from a reliance solely on promoters. While companies are set-up and scaled by their promoters, the long-term evolution of the marketplace is strengthened by a broader base of investors," Shah said.

Considering Shah's point of view, the current trend of promoter stake sales appears more encouraging. The trend of promoters selling stakes in companies accelerated in the first half of 2024 and is expected to surpass the cumulative stake sales of 2023, according to a note from Kotak Institutional Equities.

In the first six months of 2024, promoter entities from 37 companies sold shares worth $10.5 billion (approximately Rs 87,400 crore). Kotak's research indicates that this figure is the highest recorded in the past five years and is on track to exceed the total stake sales of 2023, which amounted to $12.4 billion (close to Rs 1 lakh crore).

The promoter holding in the BSE 200 companies came down to 38.8 percent in the March 2024 quarter, down from 42.1 percent in the December 2022 quarter, according to data cited by Kotak. However, a sign of optimism also emerged from this change as it was domestic mutual funds that seized the opportunity to significantly up their investments in these companies.

Also Read | Promoter selling crosses $10 billion in 2024, highest in five years

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