Don't blindly emulate promoter buying

While such buying could indicate confidence in the business, investors should do a comprehensive evaluation before getting into the stock.

More promoters bought than sold shares of their own companies in January-February this year, according to a report by Prime Database, which analysed insider trading in this period.

It says the total value of insider buying was Rs 19,463 crore (Rs 194.63 billion) and of insider selling was Rs 14,100 crore (Rs 141 billion), a buy/sell ratio of 1.38, from 1.11 in 2014-15, dropping to 0.56 between April 2015 and December 2015.

As stock markets were volatile in Jan-Feb 2016, why did promoters buy shares of their companies? Only to prop the share price or did promoters really see value at these levels?

Retail (small) investors are often advised to be wary of insider selling, as this might indicate the company is not in good financial health.

After all, who knows the company better than its own promoter? By the same logic, is it a good idea to buy shares if the promoter is buying? 

While there is no universal rule, when promoters buy shares of their own company, it is usually because they think the future looks promising and the business will do better. Or that the current share valuation is low and prices will rise in future.

“Many investors invest on the basis of insider trading but you can go wrong, as promoters sometimes buy on the hope that the company will do well,” said Prithvi Haldea, chairman, Prime Database.

Some companies that saw huge insider buying were Adani Power, Aditya Birla Nuvo, Bharti Airtel, Grasim, Kansai Nerolac, KPIT Technologies, Lanco Infratech, MRF and Welspun. Insider selling was seen at Infrasoft Technologies, Jaiprakash Associates, Max Financial Services, Pipavav Defence and Offshore Engineering, Unitech and Wockhardt.

According to Sachin Shah, fund manager, Emkay Investment Managers, insider buying should be only one of the data points that investors should look at.

“There are instances of both - where promoters buy shares because of confidence in the business and where they buy to mislead investors. If the management is of good quality and high integrity, the buying can indicate a vote of confidence in the business and that the money is well-invested,” he says. 

Feroze Azeez, deputy chief executive, Anand Rathi Private Wealth Management, suggests investors look at the top stocks that saw insider buying and find which have the best valuation before choosing.

“Combined with the insider buying data, one should look at management, price/earning ratio, etc, before investing in a stock,” he says.

Sometimes, insider buying and selling could be merely a vesting of options because the vesting period has come to an end. Sometimes, promoters buy only to reduce their cash balance or increase the free-float earnings per share.

Do not read too much into the buying unless the promoter stake increases by a huge percentage, says Hiren Dhakan, associate fund manager, Bonanza Portfolio.

“Only if promoter stake increases significantly should we take it as an indication that the development is noteworthy. Since the regulator monitors insider trading keenly, any malicious intent by promoters will be noticed. So, chances of fraud are low,” he says.