Stake of Promoter's in the equity market of the company
Hemlata Khandelwal / 2021-06-04 09:56:02

Companies need capital to grow their business, and therefore the shareholder is given a share in the company's equity as well as a portion of his advantage at the shape of dividends and the right to vote at the shareholder's general meetings. To raise this capital, companies take the help of promoters. These help in increasing the market awareness of the company, thereby incentivizing the investor to buy the respective equity security.

Who is a promoter?

When a person works for a particular product i.e. same brand and promotes the same brand/company, and takes care of it. And markets the same brand/company, and then it is called a brand/company promoter.

Has the company ever approached the bank for taking a loan? 

The banks usually accept property, gold jewelry, shares, or any of your shares and investments as a guarantee. The promoters of the company are also like that. In India, even today, a large part of the shareholding of many large companies is controlled by the founders or promoters.

Knowing the shareholding of its promoters in a company is an important stock analysis parameter. And in Indian companies, where most businesses are run by different families, shareholding shows the confidence the promoters have in the business, belike the force of leadership control.

A company, whose promoter has a large shareholding, indicates that the promoter of the company sees a bright future for the company and therefore has taken such a shareholding in the company so that he/she will be better off its growth in the future. They can earn money conversely, when promoters do not see good growth prospects for their companies, they sell their stake or the entire company to competitors.

What are the types of promoters?

Type of promoters

1. Penny Promoter: The role of money promoters is often closely scrutinized from the standpoint of ethical practices. Investors look at penny stocks with skepticism as not enough information is available about these stocks. In India, when we talk about penny stock, it means that stock that trades for less than Rs.10. It is quite common to hire stock promoters in the penny stock market. They construct stimulation in the outlet concerning stocks and fetch it to the meditation of probable investors

These promoters play a very important role in promoting start-ups. They create confidence among investors about the future performance of the start-up.

It is very risky to invest in this stock (Penny), but it can also give you huge profits. You get an opportunity to invest very attractively or at a low cost in those stocks which are not only good but have the potential to perform well in the future. Some of these stocks penned the potential to rise to very high levels, thereby multiplying your profits manifold.

If profits go up, why are penny stock promoters criticized?

This is because some of those promoters make false and misleading promotions of those shares by promoting false information about the company's performance and financial metrics. This increases the risk for the investors.

2.  Specialized Promoter in Government Securities

Promoters with a specialty in trading government securities often buy these shares at auction and then sell over-the-counter to retail investors. These promoters act like intermediaries amid RBI and ordinary investors who do not have Subsidiary General Ledger or RBI Current Account. 

3. Casual Promoters:

Sometimes it is the ordinary investors who bend into accidental impulsive in the end. Because encourages his friends or family members to clasp in private stock. Though an investor formation a benefit from all stock, then he tells it to his fellow investors, this increases the demand for the company's shares.

Tools used by stock promoters

Stock promoters employ several marketing strategies to attract the attention of potential investors -

1. Cold Calling: They call investors for information on upcoming IPOs, G-Sec Bonds, Debt Securities, and many more.

2. Email: Email is another option that helps promoters to send information to a large number of people.

3. Social Media: Nowadays, stock promoters are making a lot of use of social media to woo investors and inform them about new investment opportunities.

4. Company Reports: Some stock promotion firms prepare detailed reports of companies' performance and financial statements and make them public.

How do promoters use distortions to increase their stake?

  1. Using company (public shareholders) money to increase the promoters' stake in the company.
  2. Use of Employee Welfare Trust to show promoters' shareholding above the actual shareholding.
  3. Obtaining shares from the company at a cheaper price through Employee Stock Option (ESOP).
  4. To obtain shares from the company at a cheaper price by way of a share warrant.

Is increasing promoters' stake always a good sign?

With more power comes more responsibility. While promoters are very influential to potential investors, it is important to note that sometimes they also paint a false picture that offers investors more profitable opportunities than others. An increase in promoter’s stake in the company can mean:

1. Increase stake to increase share price- Many times promoters buy more shares to increase the share price, which is less. Buying shares not only confirms that the business has good potential and will make good profits, but it can also add unnecessary shares to your portfolio.

2. Buying unsubscribed rights issue– If the company has issued an issue but its investors have not subscribed it fully, the promoters themselves buy the remaining shares to protect the issues; thereby it is reducing the promoters' stake in the equity of the company. You go up such an increase will not make any difference to the investors.

3. The relationship between high dividends and promoters' stake- Companies that pay high dividends are most sought after, but for this reason, they are also seen. Especially in places where promoters have a major stake in the shareholding. In such cases, at times, the promoters are accused of distributing more dividends and making more profit out of it. Although investors also get their share of dividends, the disadvantage is that capital gains can be curtailed due to the low liquidity of the shares due to high promoter shareholding.

Promoters always promote a registered company such as private limited company registration in India.


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