Financial Daily from THE HINDU group of publications
Monday, Nov 29, 2004
Markets - Insight
Reading the smoke signals from `insider' trades
WOULD you think a company is heading for rough weather, if its promoter has just dumped a chunk of his holdings in the market? You probably would. But a reality check shows you shouldn't read too much into such sales. In fact, if you mimicked the "insider" trades disclosed by the Nifty companies over the past year, buying shares just after top managers did and exiting them when they sold, your portfolio would be in a quite mess today!
Yes, prices of stocks such as Hindustan Lever, Marico Industries, Bajaj Auto and Jubilant Organosys have climbed after their promoters, or managers occupying top slots, mopped up shares from the open market. But there are an equal number of instances where the stock prices have surged, after a top manager sold his holdings in the market! The stocks of M&M, Balrampur Chini Mills and Zee Telefilms have delivered big returns after their top managers sold shares in big numbers!
Occasionally, big-ticket sales by an insider do turn out to be a sign of impending trouble. Mr Girish Gelli, a director on the board of the now defunct Global Trust Bank, sold 9.55 lakh shares barely a couple of weeks before the bank's financial troubles were uncovered.
But such instances are the exception rather than the rule. If you sold shares of Balrampur Chini Mills in end-December 2003, based on the disclosures that the promoters had sold 19 lakh shares, you would certainly be ruing your decision by now. The stock has climbed by a whopping 53 per cent since this transaction in December!
In recent months, several promoters have sold their stakes in the open market to create liquidity in their stock or to make room for institutional investors, who have picked up these shares.
Insider sales are also a regular feature in technology and pharma companies, where employees are regularly allotted new shares as a part of an employee stock option package. Such instances have made insider sales unreliable, as a sign of an impending fall in stock price.
True, buying by company insiders has, in every instance, padded the wallets of investors in the recent months.
Through a series of market purchases from February 2003 to June 2004, Mr Harsh Mariwala, Chairman of Marico Industries, has shored up his stake in the company. Investors who followed in his footsteps would certainly be well off today. Since his last "buy" order in June, the Marico stock price has climbed by 38 per cent.
Similarly, a consistent trail of buying by the Bhartias of Jubilant Organosys and Madhur/Rahul Bajaj of Bajaj Auto, have also worked out well for investors who followed their example.
But given the bullish phase in the market, the rise in stock prices could just be attributed to upbeat sentiment, rather than to an actual change in the company's business that had the promoters buying the stock.
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