Zero promoter holding: Are these stocks good for investment or not?

Have you ever wondered about companies that operate without a promoter? If not, take a moment to review your portfolio and analyse the promoter holdings within it, along with the participation of various investors. Furthermore, examine their movement quarter by quarter. In business, several factors can impact investor sentiment and market perception. One significant factor is the extent of promoter stake in a company.

In the world of investing, companies without promoters often raise eyebrows and trigger concerns among stakeholders. Promoters are typically individuals or entities who initiate and support a business venture, often holding substantial stakes and influencing strategic decisions. When promoters increase their stake in their companies, it sends a powerful signal to the market, investors, and stakeholders. However, if there is no promoter holding, understanding how the company is managed and its historical performance becomes crucial.

Professionally Managed Companies 

Companies without promoters are known as Professionally Managed Companies, where professionals, instead of a single owner, manage the business. These companies benefit from having a decision-making process that isn’t controlled by just one person. Because there’s no specific owner involved, a board of directors and other independent members participate in making decisions. This means more people contribute their ideas. Additionally, these companies are seen as being friendly to minority shareholders. Unlike companies run by family promoters, which can sometimes face conflicts within the family, Professionally Managed Companies don’t have these issues.

Drawback 

Professionally Managed Companies have drawbacks too. The involvement of numerous board members often slows down decision-making, hampering quick responses to changes. Moreover, professionals leading these companies may prioritize short-term gains over long-term strategies, potentially affecting sustained growth. Their higher remuneration demands can inflate the company’s expenses. Additionally, offering Employee Stock Option Plans (ESOPs) to retain talent might dilute existing shareholders’ ownership. These challenges underline the complexities faced by such companies in their operational dynamics.

What should an Investor Do? 

Companies without promoters, commonly referred to as Professionally Managed Companies, have advantages and disadvantages. However, it cannot be concluded that these companies are unworthy of investment. There are no inherent legal issues in companies lacking promoter holdings. Therefore, investors can consider investing in these companies if other aspects of the company stock align with their investment criteria. It’s essential to conduct due diligence before investing and perform a comprehensive analysis of the company’s fundamentals. Hence, exercising caution and performing thorough research are crucial steps before investing in such entities.

Historical Performance 

I hope you are aware of ICICI Bank, as some may even hold bank accounts in it. Have you ever analysed that this bank does not have promoter holdings or significant promoter ownership? Historical performance details are not necessary to explain everyone knows it. Post merger of HDFC Bank and HDFC Ltd HDFC Bank was also included in the list of Zero Promoter holdings.

Let’s delve into companies that possess zero promoter ownership and their performance in the last five years.

However, some companies such as City Union Bank, RBL Bank, Indiabulls Housing Finance, and Yes Bank Limited have disappointed their investors with negative returns of approximately -22.68%, -52.13%, -74.48%, and -88.67% respectively over the last five years. Yes Bank and Indiabulls Housing witnessed their promoter ownership becoming zero in March 2021 and March 2023 respectively.

Meanwhile, there are companies with zero promoter holdings that haven’t completed a five-year stock market journey yet. Notably, Equitas Small Finance Bank, Zomato, Paytm, PB FinTech, Delhivery, and UTI AMC fall into this category.

Conclusion 

Of course, it’s important to check the promoter holding, understand who they are, and how they manage the company, considering their business performance, growth, and market share, among other factors. Moreover, companies without promoters are not always bad. It’s also crucial to assess the professionals managing them, in addition to their business performance.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.