A spate of stake sales by institutional investors and promoters seems to spell more trouble for the market with stock prices running into a rough patch since the beginning of this year.
Quite a few private equity firms, and venture capital investors have been selling shares through block deals since the start of this calendar year, and market participants expect the trend to intensify given the uncertain macro-economic outlook both at the global and domestic level.
Although these blocks of shares are being absorbed, the presence of many interested buyers is resulting in a change in the shareholding pattern from a few owners of large blocks to multiple owners of small blocks. This has led to a more distributed ownership structure.
Moreover, smaller blocks of shares are likely to hit the market more frequently, increasing the floating stock, which refers to shares available for trading on the open market. The availability of more shares on the market is good for liquidity in a bullish market, but not so much when sentiment is bearish.
“Private equity and venture capital firms typically focus on achieving a targeted return on their investment, and exit when they have achieved that,” Sharad Chandra Shukla of Mehta Equities told Moneycontrol.
El Nino, US banking woes
“There are concerns over the impact that El Nino will have on agriculture, and now you have the banking woes in the US as well. Things will be challenging globally in 2023, and India will not be immune to it. As a result, many large investors may choose to book profits and look for safer avenues,” Shukla said.
El Nino is a reference to a weather phenomenon that describes the unusual warming of surface waters in the Pacific Ocean, and is associated with rainfall deficit and drought in India and its neighbourhood. The US banking industry has been in turmoil since the collapse at the weekend of Silicon Valley Bank.
Share sales by promoters are also being closely watched. Conventional market wisdom is that share purchases by promoters are a better indicator than stake sales. But this too varies depending on market sentiment.
Promoters selling shares in a bullish market are taken well by the markets, but share sales at a time when the business environment is tough can be cause for concern.
On Monday, March 13, private equity firm Blackstone sold its entire 20 percent stake in Sona BLW Precision Forging Ltd for around Rs 4,917 crore, while in February, Synnex Mauritius sold its entire 24.13 percent stake in Redington Ltd for Rs 3,200 crore and Baring Private Equity Asia-controlled Hulst BV liquidated its 9.8 percent stake worth Rs 2,430 crore in Coforge.
Other big block deals include private equity player Apax Partners arm Dynasty Acquisition’s sale of a 2.14 percent stake in Shriram Finance for Rs 1,040 crore and Softbank-backed SVF Doorbell (Cayman) Ltd’s sale of a 3.8 percent stake in Delhivery Ltd for Rs 950 crore.
Several promoters have also jumped on the bandwagon to pare their holdings. SB Adani Family Trust, the promoters of Adani Group firms, have sold their stake in four firms to GQG Partners for Rs 15,446 crore.
Alibaba Group of China completely divested from Paytm, an Indian digital payments company, which was worth around Rs 2,377 crore. Biocon Ltd, the promoters of Syngene International Ltd, offloaded a stake worth Rs 2,240 crore while Embassy Property Developments Pvt Ltd sold stake worth Rs 1276 crore in Embassy Office Parks REIT. Promoters of Kirloskar Oil Engines sold around an 18 percent stake worth Rs 636 crore on 8 March.
Trend to persist
Amid foreign institutional investors (FIIs) selling approximately $2.57 billion worth of Indian equities in the year to date, there has been a surge in significant block trades. In 2022, FIIs divested Indian equities worth $17.21 billion.
Despite this, analysts predict that the trend of block trades by investors will persist as cautious FIIs are expected to be replaced by domestic institutional investors and even high net-worth individuals.
"Considering the ongoing high level of global uncertainty in terms of high inflation, a likely Fed rate hike, elongated geopolitical issue of Russia-Ukraine and recent turmoil of large banks in the US, the market is expected to remain volatile over the near term. Moreover liquidity in many stocks fell recently. Therefore, a block deal is a better option to offload a sizable chunk of holdings. Also, a few PE investors and other holders of new-age technology companies seem to be uncomfortable to keep holding their stakes in such companies amid uncertainty on turn-around of such loss-making entities," said Mitul Shah, Head of Research at Reliance Securities.