A Cautionary Note on Recent Trends in Indian Markets
Highlighting a disturbing trend that we have come across
Having been an investor in the Indian markets for the past 15 years, we have had the privilege of building a robust network across buy-side professionals, sell-side analysts, merchant bankers, and even company promoters. This network has not only enriched our understanding of market dynamics but also provided us with unique insights into some of the lesser visible practices shaping stock movements.
Disturbing Trends in Promoter Behavior
Recently, we have come across certain practices that raise significant red flags for investors. In a couple of instances, we observed promoters borrowing substantial sums from financial institutions while simultaneously asking these institutions to buy shares in their companies. Here’s how the process unfolds:
Promoters of listed company taking loans from questionable lending entities in their personal books
Lending entities buying shares from the open market/ company issuing shares to them via a pref issue
Active Stock Price Management: Through collaborations with market operators and managed news flows, these promoters manipulate stock prices, creating a misleading impression of company performance.
Inflated Exit Strategy: Once the stock price has been artificially inflated, the lending institutions sell the shares at these elevated levels, recovering not just the loan principal but also an interest component - completing the entire transaction.
Building Awareness Through Data
To safeguard our own investments, we have created a list of these ‘lending entities’ as well as also companies which are related to these (common directors). As a process, we now check the shareholding pattern to find whether any of these entities were a part of their shareholding pattern in the past or in present. Tracking these entities and their related investments helps to:
Spot Patterns: Repeated involvement in questionable practices.
Assess Risk: Identify stocks that may be subject to price manipulation.
Enhance Due Diligence: Provide an additional layer of scrutiny before making investment decisions.
Why This Matters
As investors, we often focus on quantitative metrics like earnings growth, cash flows, and valuations. However, understanding the qualitative aspects—the motivations of promoters, the behavior of institutional players, and the subtle signals in stock price movements—is equally critical. These insights help us avoid potential landmines and identify genuine wealth-creation opportunities.
The Road Ahead
While these practices are concerning, they also present an opportunity for vigilant investors to deepen their due diligence processes and identify potential pitfalls before they manifest. As we continue to track these developments, we’ll share our findings and insights to help build a community of well-informed investors.
Our clients have received the list of these companies and entities and our request to them is to keep it private to prevent any undue legal challenges.
If you are interested in accessing this research and joining a network of informed investors, please contact us at Gaurav.a@nineonecapital.in