STAKE SALE BY PROMOTERS - NOT ALWAYS A BAD THING
By Ruma Dubey
The big news in corporate India today is obviously the four core founders of Infosys – Narayana Murthy, Nilekeni, Shibulal and Dinesh sell 3.26 crore shares held by them at a base price of Rs.1988/share. These four together hold 12.4 crore shares and they were offering to sell 25% of their holding. And why did they sell? They wanted to raise money for personal reasons and for pursuing philanthropic ventures. Naturally, the stock price slumped big time even though none of the four members are today actively involved in the day-to-day operations of the country. And if they are holding shares and need the money, like any of us, they too are exercising the option of selling. Yet, the market is always jittery when promoters, in this case, the core founders reduce stake.
A couple of days ago, we saw the same thing in Crompton Greaves where the stock price crashed after block deal by its promoter group company, Avantha Holding, to sell 4.2 crore shares or 7% stake of its 42.67% holding in the company. The money raised here was to be used to bring down its debt and fund other projects.
In September, over two days after news came in of stake sale, the stock price tanked over 26%. The promoter, Jaypee Infra Ventures, sold 13 million shares of JP Associates, which was 1.45% stake. The company clarified that this holding was sold to meet its requirement of funds including for social cause.
Widely, the market perceives any stake sale by a promoter as negative news, even if it is for deleveraging the balance sheet or like in the case of Infosys, for personal and other ventures. Probably this is deep-rooted in the psyches that selling one’s stake in own company is akin to selling family gold, the beginning of the end.
Yes stake sale to pare debt does indicate a stretched balance sheet and instead of selling assets, when they sell stake, it conveys a sort of running away. That is probably why when companies sell assets, say land parcels or hotels or other properties, or even sells off a unit, it is viewed as a positive step – it is then said the company is focusing on its core business and selling non-core assets to reduce debt and improve margins. Take the case of Essar group or even Aditya Birla group, which sold its BPO unit for $610 million and $260 million respectively to use funds raised to retire debt. The stock prices zoomed.
In fact there is a report put out by India Ratings & Research, which said that after studying some 500 companies with debt, it concluded that it would be a big challenge for companies to deleverage their balance sheet even moderately. On the other hand, it said that if they sell stake, 262 of these 500 companies would require around Rs.7 lakh crore, which in itself would be a huge challenge. The rating agency to reduce current leverage levels to FY10/FY11 levels, that in itself would take around 30 months.
Thus stake sale alone cannot stave off the huge pile of debt; it would be like a small drop in the ocean, only asset sale can help bring down bigger chunks of debt. Every stake sale cannot be worrying – when the promoter continues to hold his majority stake and reduces only a minuscule stake, then it’s not really worrying. Even when promoter sells his entire stake in a subsidiary to realize better valuations, it’s a good thing. Or then the case of Infosys; these founders are now in the real sense not the ones running the company, so where is the question of leaving the company into the wind? Yes, it is most certainly alarm bells ringing when the promoters, to begin with do not have a very big stake and then sell major portion of it – especially in companies where there are already major corporate governance issues. When fundamentals are themselves questionable and promoters sell stake, it’s time for you also to run as far away as possible! Take the case of Kaveri Seeds; it was recently in news about promoters planning to sell stake but if one looks at their shareholding, it has been coming down consistently – from 63.64% in March to 62.25% in June and now at 57.66% in Sept. There was also the case of Spicejet, where there were rumors that Maran was planning to sell his majority stake in the company; that did not happen but look where the company is currently. So in some cases, even if there are only rumours of promoters selling stake, its imperative to take them seriously. Remember, there is no smoke without fire.
Thus not all stake sale by promoters is bad. It does work negatively on the mind but consider various other factors before allowing yourself to be led astray by panic mongers.