(10) Boosting The Stock Price Of A Dumped Company
It is one of the most common reasons why company promoters increasing stake in a given script. Every stock is not actively traded in the stock markets.
Some stocks are highly active while others are almost dormant or dead in terms of price fluctuations. Several times promoters simply buy more shares to boost the stock price that might be in the dumps.
This stake increase by promoters is nothing to do with the good prospect & expected profits of the company.
For example, promoters of Everonn Ltd increase their stake from 42% (Sep 2011) to 55% in (Dec 2011). But, the outcome was quite disappointing.
Investors investing in such stocks solely on this basis are likely to get disappointed.
Thus, you should always try to find the real reason behind stake increase before following promoters blindly.
(11) Counteracting A Hostile Takeover Threat
It is one of the most critical reasons why company promoters increasing stake in a given stock. A hostile takeover is referred as the process of acquisition of one company (or the target company) by another company (or the acquirer).
The key characteristic of a hostile takeover is that target’s company management doesn’t want the deal to go through.
If a company promoters or management feels that their organization carries the risk of hostile takeover then they will try to defend such takeovers by using different strategies. Promoters may raise their stake in the company to prevent any forced takeovers.
According to a post published in Modern Health Care, Wayne Smith, CEO of Community Health Systems (CHS) bought 15.5 million shares of CHS in 2016 to become its largest shareholder simply to prevent possibility of hostile takeover.
Although, there is no environment for hostile takeovers in certain countries such as India but there are always some possibilities left if promoters holding is less.
Therefore, a rising promoter’s stake in such circumstances has nothing to do with the fundamentals of the company. Thus, investors should never forget to look other factors as well when investing in such companies.
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