A lot of money raised by promoters' stake sale finding way back into secondary market: Feroze Azeez

Economic Times

03-07-2025

Feroze Azeez, Joint CEO, Anand Rathi Wealth, suggests promoter stake sales, once frowned upon, are now viewed positively due to India's high promoter holdings and low free floats compared to global markets. He notes substantial domestic institutional investment requires quality paper, making promoter dilution necessary for sustainable valuations. Azeez anticipates more block deals, driven by price-sensitive domestic institutions, contrasting with FIIs' price-inelastic behaviour.
Lots of block deals are happening in the market. What is your sense of the block deal money where promoters are raising capital? Is it coming back to equities? Is it going back into private capital? What is happening with so much fundraising that is happening?
Feroze Azeez: Fundraising happening at promoter level is finding its way back into equity markets in the secondary market. I think the answer lies in what proportions are going back into the capital markets. About 30% to 40% in my estimate – guesstimate – I would like to call it, goes back into capital markets.
There are a lot of secondary deals that are happening. Even in the unlisted space, one of our clients raised almost Rs 1,000 crore from one of the FMCG giants and put back almost Rs 600-700 crore into the capital market. If I look at how our HNIs who are running listed companies or unlisted companies over a billion dollars are doing, I would say, at least 40-50% of that goes back and finds its way into the capital markets.
The fact that promoters are selling means that stocks will top out, and money will be knocked out of the equity market. Is that changing this time? Promoters are selling some parts of their own businesses, but are investing in other businesses. Should we not buy the argument that lots of block deals and liquidity will be sucked out?
Feroze Azeez: I completely concur with you. That argument is for old days. Earlier, it was very strongly frowned upon when the promoter was decreasing the stake. I personally think this time around, the promoter is decreasing the stake because we are one of the highest promoter holdings. Free floats in banking and financial services or Bank Nifty, is about 86%. At the least, free float is 46% for IT if I am not wrong and FMCG also has a free float of about 45-47%. These are the two sectors with least free float. Pharma also has very little free float.
So, globally compared, India's free floats across sectors is one of the least except for banking. It is gradually being seen as positive. I think that is the natural direction. Rs 14.5 lakh crore has come into equity markets from FY21 from domestic institutions – that is Rs 14.5 lakh crore in 50 months after FY21. That has to get good quality paper and if promoters do not dilute, we will be increasing valuations unreasonably and that is not sustainable.
How do you see the trend shaping up going ahead because the first half and especially in the last month, we have so many big deals happening. Can we expect to see more of these in the second half as well?
Feroze Azeez: I think yes. FIIs have this tendency of buying on screen and selling on screen. So, every rupee which comes in from FIIs or every rupee which goes out from FIIs, transmits into larger price movements, that is because they believe in buying on a screen even if the stock moves 10% or 15% up. On the other hand, a domestic institution has a very specific price. They give a narrative of a very long-term story. Institutional brokers will not even buy it at Rs 832 even if they have to buy 10 lakh shares. The point I am trying to make is in the long term, will block deals increase? The answer is yes because domestic institutions are the ones that are pumping in the money and they are very price sensitive. FIIs are price inelastic. Another day, I will show you data to prove this hypothesis. We understand that of these promoter blocks, more than 20% has been absorbed by mutual funds. Is that correct?
Feroze Azeez: Yes, absolutely, and I think rightly so. I might have mentioned this but what disturbs me the most about Indian equity is the lower free float. The NSE 500 free float company is about Rs 3,000 crore or Rs 4,000 crore, not even half a billion dollar free float and that is the top 500 company. And I do not ever feel sad. I feel sad about being the 350th free float in the NSE 500 just having a billion dollar free float or a little lower than a billion dollar free float. Anand Rathi Wealth is somewhere around 350th free float in NSE 500. So, the point I am trying to make is yes, going forward block deals will increase and I see it very positively. In one of the events, I asked the Sebi ex-chairwoman if there is so much money coming in and we have 140 crore people, where will the paper come from? She was reasonably positive that promoters will also sell and give good paper in the marketplace.
What is the overall view right now on the market? Does it seem like we will continue to hold out? We are just 2% shy from that all-time peak, but forget the index at a larger participation level. Do you think this kind of money inflow will continue?
Feroze Azeez: I personally very strongly believe that this will continue. In fact, if I have to flip it in one way, one thing which I have been talking about is that the cash market has become a derivative. Derivative markets dictate where the cash markets are going. And this is one hypothesis which I have been trying to check.
On expiry days, Nifty moves as per the derivative market. The derivative is called a derivative because it derives its value from the cash market. Let's break derivative indicators short-term market movements into four components. One of them is, of course, derivative indicators. The second is liquidity. Third is the fundamentals of the companies. And fourth is macroeconomic variables. In the chronological order of their importance for the time frame in view, for the short-term view like a week, 10 days, 15 days, derivative indicators are the sharpest predictive capability. Now, let me tell you what that is implying. We have 36% long and short. Long is 36% in index futures for FIIs. Second, the synthetic futures which I keep highlighting, are one of the best barometers for this month, and are now quoting at a premium of Rs 95 which is close to the implied cost. Last week, it was significantly greater than an implied cost of 5.5% forward which means that there is some degree of pullback in the subsequent expiry possible that is indicating a neutral stance. So, derivative markets are giving a little push upwards from an indicator standpoint and liquidity is reasonably good as well.
Of late, select block deals and especially where the promoters are selling their stake in some companies was seen to be happening where the stock valuation is stretched. That makes the investors nervous as well. How should one read into that? Is it really a red flag for the investors?
Feroze Azeez: I personally think it is certainly a red flag. It also depends on how they have behaved in the past because when you speak of a specific company, it is very easy to analyse what has been the behaviour. Now, if that is the kind of tendency at every peaks or valuations of their business, then I would be very circumspect of that specific block deal or an OFS because every time valuation goes up, if you are trying to dilute, then you are not here to make money for the retail guys.
For example, a couple of IPOs left a lot of money on the table relative to the unlisted space. Those are very good indicators. I think the devil is in the details when it comes to this specific hypothesis. Are people selling out as promoters just capitalising on moving money from retail's pocket to their own or do they genuinely want liquidity for more credible purposes.