Promoter dilution in small, midcaps surges

The controlling shareholders of smaller and mid-sized companies are reducing their stakes at levels seldom seen since the 2008 global financial crisis.

Over 20 per cent of companies listed on BSE MidCap and BSE SmallCap have seen a decline in promoter holdings for five consecutive quarters, reveals data from DSP Mutual Fund, shared with Business Standard.

In the latest June quarter, the figure stood at 22.6 per cent.

Similar levels were last seen in FY07.

Both the midcap and smallcap indices reached all-time highs on September 24.

Further analysis by Business Standard, using Capitaline data, shows lower profit growth for companies in which promoter dilution has taken place.

The stake sales may reflect that a section of promoters feel their companies are overvalued, while others may be selling to convert some of their locked-in wealth into more easily accessible capital, said Nipun Mehta, founder and chief executive officer for multifamily office BlueOcean Capital Advisors.

In some cases, stocks have taken it in stride because of the fact that lower promoter shareholding means higher liquidity.

Markets don't seem to be taking it too negatively, he said.

Typically, around 16.9 per cent of companies on average see some dilution in promoter stake in any given quarter, shows data going back to 2001.

The decline in promoter stake can reflect multiple causes, including fundraising, stake sales, and granting shares through employee stock ownership plans (Esops).

The peak dilution took place in 2005, when around 30.9 per cent of promoters diluted holdings.

Dilution declines during periods of market downturns, such as in 2008 after the global financial crisis and during the pandemic in 2020.

An analysis of 922 companies from BSE MidCap and SmallCap shows that profitability of companies witnessing promoter dilution varies from the rest.

Companies with reduced promoter holdings saw a 4.6 per cent year-on-year (Y-o-Y) increase in profit after tax as of June 2024, compared to a 17.9 per cent rise for companies where promoter stakes increased.

Y-o-Y change has been used to eliminate the effects of seasonality.

A sectoral analysis for the June quarter reveals that smaller and mid-sized information technology companies led in promoter dilution, with 20 firms showing lower promoter holdings compared to the previous quarter.

Technology companies typically use Esops to reward employees, which can dilute some promoter stakes.

But there have also been stake sales.

Private equity group Blackstone sold 15.1 per cent in Mphasis for Rs 6,736 crore in June, promoter group entities sold a 1.8 per cent stake in Affle India for over Rs 300 crore later in the same month.

Sectors, such as pharmaceuticals, finance, steel, and chemicals have also seen promoters reduce their stakes.

Independent market expert Ambareesh Baliga suggested that the strong rally in these companies may have provided promoters with an opportunity to cash out for other ventures.

Younger generations in many promoter families are not necessarily continuing in the family business and are using stock sales to generate capital for new undertakings, he said.

Valuations are expensive I don t know how long it can continue, said Baliga.