Beyond Narratives - Insider selling – a different perspective

Greetings from Team Carnelian.

In our monthly letters, we typically delve either into our investment philosophy or address prevailing concern/narrative that needs proper context. This month, we turn our attention to a topic gaining significant traction: heavy selling by promoters or insiders. Is it inherently a cause for concern?

In recent few years, discussions around heavy selling by promoters or insiders have gained prominence in media and investment circles. The phrase “insider selling” often sparks unease, suggesting promoters/ executives abandoning ship before troubled waters. But is this instinctual concern always warranted? This month, we have articulated on this topic with the clarity and nuance it deserves, offering context to separate signals from noise.

Understanding the types of insider sellers

To make sense of this trend, it is important to distinguish between the different categories of insiders:

• Family-owned business promoters

• Private equity promoters (buy-out/majority stakeholders) and private equity investors (minority stakeholders)

• Professional management (CEO/CFO)

Grouping all insider selling under a broad label and perpetuating the narrative that "insiders are selling" oversimplifies the issue and misleads the market. Let us provide a more detailed perspective.

Family-owned business promoters

Family-owned business promoters may sell for numerous strategic or personal reasons:

• Family separation/settlements: divestment can occur due to family separations or settlements.

  
  

  Our view: In family-owned businesses, such transactions can serve a legitimate purpose. Promoter sales for this purpose aim to streamline ownership structures, succession, reducing uncertainty and fostering stability. Far from being negative, these events can be positive for the stock. Examples include companies like those within the Kirloskar Group, Shivalik Bimetal, and InterGlobe Aviation, where such moves have clarified governance and supported long-term value creation.

  
  

• Funding new ventures or personal causes: Promoters may require capital for launching new businesses, acquiring property, or philanthropic commitments.

  
  

  Our view: Moreover, promoters who’ve spent decades building a business deserve to leverage their equity for personal or family needs. With growing wealth, selling shares to fund lifestyle upgrades, philanthropy, or to seed new ventures for younger family members is entirely reasonable. For example, as a board member of Metro Brands, I’ve observed promoters selling a modest stake (~1.5%) to acquire property while simultaneously planning the company’s five-year growth trajectory. When promoters need liquidity, their company’s stock—often their primary asset—is a natural source, reflecting personal financial planning, not a lack of confidence. As investors, our focus should remain on the company’s fundamentals: Will it grow over the next five years? Insider sales, when viewed in context, are a minor detail compared to metrics like revenue growth, competitive moats, and management’s strategic vision. By anchoring our decisions in fundamentals, we avoid being swayed by short-term noise.

• Regulatory compliance: Additionally, regulatory requirements can drive promoter selling. SEBI mandates that listed companies reduce promoter shareholding to 75% within 18 months of listing. For companies not requiring fresh capital, promoters have little choice but to sell shares to comply, irrespective of their outlook on the business. Such sales are procedural, not a reflection of doubt in the company’s future. Avenue Supermarts, JSW Infra, Hyundai Motors, NTPC Green and many more fall under this category.

  
  

  Our view: Generally, such companies are reputable, and their divestments provide opportunities to acquire stock that was previously unavailable.

• Diversification of risk: Promoters often have 80–100% of their wealth tied to a single business. Creating liquidity for family offices or investing in other asset classes is a prudent strategy.

  
  

  Our view: promoter sale driven by diversification are not inherently negative, except in specific circumstances outlined later. Diversification is rational and often necessary. Regulatory constraints limit insiders’ selling windows, making family office liquidity a valid approach. As portfolio managers, we frequently oversee family office investments focused on diversification and liquidity—capital remains within the market ecosystem.

To sum up, not every sale should be viewed negatively. The intent and size of the divestment, promoters’ remaining stake, their historical divestment patterns, capital allocation track record, success in value creation, and their values and lifestyle are critical factors to consider.

While many cases of promoter selling are benign or strategic, some situations warrant caution:

1. Frequent divestment by the promoters/insiders: Repeated sales without a clear rationale can be a warning sign. Good promoters do not sell frequently unless they are part of a pre-defined plan.

2. Large sizeable divestment: Voluntary sizable divestments (e.g., a 25-50% stake) require scrutiny, particularly when attributed vaguely to “diversification.”

3. Frequent buys/sells coupled with volatility in the numbers: Frequent buying and selling, especially when coupled with financial volatility, suggests opportunistic behavior — something we are cautious of.

In summary, promoter sale should not be viewed as negative without a thorough evaluation.

Backing it with data

Contrary to popular belief, insider selling is not a predictor of poor stock performance. Historical data shows that ~70% of companies with promoter sales in the last 10 years delivered positive returns, and ~15% generated 30%+ CAGR.

Promoters sold in last 10 years

Consider specific examples:

IndiGo (InterGlobe Aviation): Despite Rakesh Gangwal's exit starting in 2022, the company posted its best-ever results, with revenue growing from Rs. 26,000 Cr in FY22 to Rs. 80,000 Cr in FY25 and profits exceeding USD 1bn in FY24. The stock delivered a ~50–55% CAGR over three years.

Polycab: Despite promoter sales (~6% over five years), the company saw ~25–30% revenue growth YoY and ~50% stock CAGR — a textbook case of inter-generational wealth diversification.

Our view: Blanket negativity around insider sales is counterproductive. Each situation must be assessed based on size, intent, and frequency.

Private equity promoters (Buy-out/majority stakeholders)

"Private equity (PE) firms typically invest with a 7–10-year horizon, acquiring stakes early and exiting in later fund years. Since it is not a permanent capital, their exits often align with favorable market conditions and fund life cycle. Every sale is not necessarily reflecting the underlying business's prospects.

Historical data again shows ~70% of companies delivered positive post-exit performance.

Companies where PE/VC sold in last 10 years

Historical examples show that companies can continue to perform exceptionally well across all business aspects despite private equity (PE) promoters exiting from the companies.

Coforge: After Barings PE exited in August 2023, Coforge, led by a professional management team under Sudhir Singh, sustained strong growth momentum with robust CQGR (in constant currency terms) and a successful margin turnaround. Despite a 100% free float, it has been among the top performing IT stocks in recent years.

Professional manager selling: In professionally managed companies, CEOs or CFOs may divest stock during their tenure.

Our view: Such sales are typically legitimate. They do either for personal needs or exercising their options. However, caution is advised if executives frequently sell or fully exit their positions. For instance, IndusInd Bank’s top management sold shares before a major governance issue triggered a 40% stock price decline.

Our broader perspective: a maturing capital market landscape

Promoter and private equity (PE) selling, as outlined, is often driven by legitimate reasons. While insider selling warrants cautious observation, it should not be viewed as negative. Insider selling should be contextualized within a maturing capital market.

Consider the following:

• Insiders sold USD 15.8bn (2020), USD 15.1bn (2021), USD 9.8bn (2022), and USD 20.1bn (2023).

• Markets delivered strong returns over the same period.

• Many insiders left value on the table, indicating their actions were driven by personal or strategic needs, not necessarily market/business pessimism.

We have two perspectives to share on Promoter and PE Divestments

1. Capital re-circulation: much of the capital raised through divestments is reinvested into markets via family offices or alternative investments, fuelling economic growth

   • The number of family offices in India surged from 45 in 2018 to over 300 in 2024, managing ~USD 30bn in AUM, equivalent to ~10% of domestic mutual fund equity AUM. This capital often originated from dividends or divestments, come back to markets or economy through their investment with professional money managers like us.

   • India’s private equity (PE) industry has grown significantly, with PE and venture capital (VC) investments reaching USD 56bn in 2024. PE firms, such as Warburg Pincus, Blackstone, Barings, and Advent, are increasingly confident in acquiring large stakes due to the maturity of secondary markets, which provide clear exit visibility. Exit activity surged to USD 33bn in 2024, a 16% year-over-year increase, driven by public market exits like IPOs and block trades.

   Every successful divestment strengthens PE firms’ future fundraising and deal-making capacity, enabling larger check sizes and more ambitious investments. These exits reflect a vibrant capital market ecosystem and should be celebrated as evidence of market maturity, not viewed with scepticism.

2. Structural shift towards board-run enterprises: As economies grow, capital markets facilitate the separation of ownership from management — a hallmark of market maturity. This trend aligns with the evolution of developed markets. As economies expand, businesses achieve significant scale, and capital markets mature, necessitating a clear distinction between management and ownership. Capital markets serve as an effective mechanism to enable this separation. High-growth environments drive:

   • Increased demand for capital

   • Diverse investment opportunities

   • Greater availability of professional talent

     
     

This economic transformation has significantly increased free float, reducing promoter control and transitioning companies toward board-run enterprises. With each divestment by large family offices or private equity (PE) funds, companies become less promoter-driven and more professionally managed — a positive trend. India is increasingly adopting this model, with “promoter-less” companies like L&T, ICICI, ITC, and HDFC Bank leading the way. Recent examples include Coforge and Crompton Consumer, which transitioned to board-run structures post-PE exits. This mirrors similar shifts in developed markets like the US, Japan, and South Korea.

The evolution of free - float holding in the US since the 1980s provides a compelling parallel:

Compared to developed markets, India still has room to grow in terms of free float and board-driven governance structures.

Conclusion:

Promoter or insider selling is not inherently negative. What matters is the intent, frequency, and residual ownership — not the event in isolation. Investors should instead focus on:

• Are the fundamentals of the business intact?

• Is the management stable, and is their execution consistent?

• Are capital allocation and governance practices sound?

• Is valuation of the company offering favourable risk-reward?

In all our portfolio companies, the answers to these critical questions — around business quality, management integrity, and long-term value creation, are a resounding YES. As long-term investors, we prioritize sustainable value creation driven by robust business models, not short-term market optics. When you encounter headlines about insider selling, pause to consider the broader context, not every sale signals cause for concern. At Carnelian, we diligently monitor promoter activity, maintaining an unwavering focus on business model quality and management integrity.