As stock markets surge, focus is on 'insider' selling gathering steam

Selling by “insiders” has picked up amid stocks scaling new highs.

In July, they sold shares worth more than Rs 10,000 crore, and in June and May around Rs 7,000 crore each. Selling had slowed during April following a correction in the market due to the lethal second wave of the pandemic.

In terms of regulatory requirements, companies must disclose to the stock exchange any buying or selling by promoters or key managerial personnel (KMPs). Business Standard analysed raw disclosure data to arrive at the monthly trends.

In recent months, several top executives of banks and other financial institutions are seen liquidating their holdings. Besides, promoters of several mid- and small-cap companies too have pruned their holdings.

Selling doesn’t necessarily mean that these entities are trying to cash in on the bullish sentiment. Some said they had to sell their holdings to generate cash to subscribe to shares in the fresh employees’ stock option programmes (ESOPs), while some said they had been selling at regular intervals to meet other requirements.

However, some say “insiders” are being opportunistic, given the pickup in activity when the markets have touched record highs, and valuations are high compared to historical levels.

“A lot of stocks are currently overvalued. Insiders are taking advantage of the market opportunity. I guess a lot of insider selling is happening in the mid- and small-cap space, and their valuations must be at a huge premium to their historical averages. If an insider is selling, and if the price to earnings multiples move up without any change in the growth outlook, then it is a clear red flag and a strong case to exit the stock. It is time for retail investors to take a hard look at the valuations of the stocks they hold,” said G. Chokkalingam, founder, Equinomics.

The benchmark Nifty has gained 18.8 per cent this year, while the mid-cap and small-cap indices are up 32.4 per cent 42.4 per cent, respectively.

“It signifies that insiders themselves think it is good to book profits, whereas investors expect the stocks to move up further. It is a red flag for sure. But so many red flags keep popping up in this market, but no one wants to even look at them because the flush of money that is coming in negates these red flags for the time being. It’s only when the markets fall that they start thinking about all this,” said Ambareesh Baliga, an independent analyst.

Despite valuations reaching lofty levels and muted June quarter earnings, the markets have continued to make new highs. Barring the wobble in January and then in April, indices have largely been on a secular up move this year.

The rally has come on the back of strong inflows from foreign portfolio investors (FPIs) as global central banks have continued with asset purchases and low-interest rates regime. So far this year, FPIs have pumped in Rs 51,007 crore into the domestic market.

Deepak Jasani, head of retail research, HDFC Securities, said if the selling was to fuel fresh ESOP purchases or buy properties, it was not so much of a red flag. Also, if the promoters are selling to reduce their loans or pledged holdings, he said investors should be watchful about how much stake was being offloaded.

“In cases where promoter or employee holding is falling sharply, it could be cause for concern and may need further probe. Insider selling is just one of the signals that the market provides. Investors should look at this in conjunction with other signals -- operations, financials, developments, competitive scenario, loan repayments, etc. to decide on whether they should hold on to or sell their shares,” said Jasani.