Surge in promoter sell-offs: A signal of market peaking? Leading fund managers Rajeev Thakkar, Roshi Jain and Dinesh Balachandran have differing takes

Not all promoter stake sales can be construed as a sign of valuations peaking, said prominent fund managers at the Moneycontrol Mutual Fund Summit 2024, held in Mumbai on August 22.

Leading value investor and Chief Investment Officer at Parag Parikh Mutual Funds, Rajeev Thakkar, stated that the rising promoter selling is a definitive sign of a market peak. However, other fund managers believe that a distinction needs to be made regarding the nature of these sales. Not all promoter stake sales can be construed as a sign of valuations peaking, said prominent fund managers at the Moneycontrol Mutual Fund Summit 2024, held in Mumbai on August 22.

Rajeev Thakkar, CIO of PPFAS Asset Management, expressed that he sees promoter selling as one of his biggest worries in the current bull market. He remarked, "At the beginning of a bull market, investors have the money, and promoters have a vision. At the end of it, investors are left with vision while promoters have made money."

For the record, promoter stake sales have been on the rise over the past year, with the bigwigs of India Inc. cashing out upwards of Rs 80,000 crore through open market transactions and offers-for-sale in 2024 so far. This follows the sale of stakes worth Rs 1.35 lakh crore in 2023.

Typically, a spike in promoter stake sales is viewed as a red flag in the market and has a significant signaling effect on stock prices, as it indicates that insiders, who intimately know the businesses, do not see their stocks as attractive enough to stay invested. The increase in promoter stake sales has made investors uneasy, raising concerns about the market peaking amid lofty valuations.

Also Read | Promoter stake sales surge 93% in FY24, experts expect trend to continue

However, some fund managers at the Moneycontrol MF Summit emphasized the need for a more nuanced approach to interpreting this trend. Dinesh Balachandran, Head of Equity at SBI Mutual Fund, while agreeing with Thakkar's hypothesis that promoter selling is a negative sign that needs to be considered, suggested that investors should categorize these sales into different buckets to form a clearer view of the stocks.

Balachandran noted that when a promoter sells opportunistically for specific reasons, it may not necessarily be a red flag. For example, multinational corporations taking advantage of valuation differences between their international and Indian subsidiaries may not be a bad sign. Similarly, parent companies with high financial burdens might sell stakes in their subsidiaries—the only liquid assets available for debt reduction.

Anil Agarwal-led Vedanta Ltd. is one such case. The company recently divested a 3.17 percent stake in its subsidiary Hindustan Zinc through an offer-for-sale (OFS) from August 16-19, aiming to raise Rs 6,000 crore. In this instance, the stake sale by the promoter was not aimed at cashing in on rising valuations but rather at deploying the proceeds toward debt reduction.

There have also been several instances where the government has trimmed its stake in state-owned companies, offering investors a chance to participate. NHPC, Ircon International, and NLC India are a few cases in 2024 where the government has pared its stake.

Adding another perspective, Roshi Jain, Senior Fund Manager at HDFC Asset Management Company, stated that promoter sales can also be a strategic move for portfolio diversification. "Sometimes promoters diversify, which isn’t necessarily negative. They might want to take some money off the table after a significant re-rating, perhaps reallocating it back into equity markets," Jain said.

Thakkar further added that promoter diversification can result from various factors, such as generational shifts or private equity exits.

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

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