Small, Mid-Cap Promoters Fail To Snap Up Cheap Buybacks Amid Market Rout

Indian markets have just witnessed their steepest fall in nearly five years, sending shockwaves through investors. But for those with an eye for opportunity, this correction could be a golden ticket.

When key executives, especially company promoters, start buying up their own shares, it's often seen as a strong vote of confidence. However, small and mid-cap promoters—favourites among retail investors— sold more than they bought, despite most of their shares trading under correction.

Usually, companies with high promoter holding stocks are considered to be safer to invest in, compared to those with relatively lower stakes.

Out of the 250 stocks in the Nifty Smallcap, nearly 200 have dropped over 10% from last year’s peaks, with 144 plunging into ‘bearish’ territory—down more than 20%. Midcaps aren’t faring much better, with nearly 70 out of 150 stocks slipping into the bearish zone, according to Bloomberg data.

In November and December last year, as the small and mid-cap benchmark dropped over 11% from its peak, promoters were net sellers, offloading more shares than they purchased. Promoters of small-cap stocks sold shares worth nearly Rs 15,000 crore over both months on a gross basis.

Meanwhile, promoters of mid-cap buying were only marginally over what they sold, according to data from PRIME Database.

An analysis of monthly selling in 2024 shows that promoters of mid and small-stocks have sold more in most of the months, potentially signalling a red flag, while retail investors are increasingly mopping up stakes.

Further, bulk and block deal data also shows that India Inc. promoters sold Rs 1.12 lakh crore in 2024, nearly topping the record Rs 1.15 lakh crore sold the previous year.

Promoter selling stocks cannot be generalised, as multiple factors can be at play, according to Pranav Haldea, managing director at PRIME Database Group. "One obvious way to look at it is that if promoters are selling, it could indicate that stocks are overpriced, and they are cashing out," he explained. "However, it could also be that they are selling to invest in new businesses or for deleveraging or for some personal expenses."

Haldea also pointed out that in some cases, promoter selling could be driven by regulatory requirements, such as meeting minimum public shareholding norms. However, he noted a clear trend. "What is clear is that there has been significant amount of promoter selling in CY 2023 and 2024."

The contrast between rising promoter selling and strong buying interest from retail investors and domestic institutions raises concerns. "If promoters or insiders are buying, it’s always a positive signal for the markets. But if they are selling, the question is why?" Haldea said, stressing the need for deeper analysis at the company level.

Promoters of large-cap stocks, however, paint a positive picture as they have capitalised via buybacks during the correction. In the last two months of 2024, they purchased stocks worth Rs 4.52 lakh crore, while selling only Rs 35,500 crore.

Notably, November saw buybacks worth Rs 4.5 lakh crore—the highest recorded since at least 2019. Promoters buying in large-cap is surely a positive, Haldea said. "This also ties up with the broader commentary of large caps being reasonably valued versus mid and small-cap."

The benchmark NSE Nifty 50 and the BSE Sensex have fallen 13.3% and 11.7%, respectively, from the previous peak, triggering the worst fall since 2020. India stocks' overall market cap has plunged nearly $1.2 trillion since its peak last year to $3.99 trillion, according to Bloomberg data.

Slowing earnings and economic growth, high valuations and looming trade tensions have taken the shine from the once-favourite stock market. Amid this downturn, retail investors bore the brunt with their heavy investments in small and mid-cap stocks seeing a big rout.

Indian stocks remain under pressure, even as two key macroeconomic events — union budget's tax sops and central bank's rate cuts —failed to lift investor sentiments.

Even top analysts are divided on the revival of Indian stocks, but they do agree that inflows by global funds will not boost the market.