The Hindu Business Line : Is there a pattern in insider trades?

By now, we know that most retail investors and fund managers were caught unawares by the brutal corrective phase in the Indian stock markets. The reversal since January 10 shaved 16 per cent off the BSE Sensex, with many stocks losing much higher value.

Some market gurus and investment experts may have warned of high valuations prior to the crash, but did company insiders sense the same? Or were they as surprised as the leveraged small investor? And how did insiders behave during the crash? Did they mop up shares because they saw value in their companies?

Business Line scanned the insider trading disclosures that all key management personnel, directors and beneficial owners of shares in a listed entity regularly furnish to the stock exchanges to discern a few trends.

In all, we screened 59 different insider trades (just before, in between and just after the correction phase) involving 53 big/medium/small companies operating across 25 different sectors. The scrutiny revealed interesting trends:

Insiders in several small and mid sized companies did manage to offload shares just before the correction struck, with insiders “sells” exceeding insider “buys” during this period.

The onset of the correction saw many insiders lose their nerve, much like small investors, to offload their stakes in their companies

Some promoters did use the decline in values to accumulate stakes in their companies, but waited for the correction to run its course before they did so.

During the week before the crash (when stocks were at or near life-time highs in some cases) 35 such insider trades were struck, two-thirds of which were sale transactions.

Divine timing

Sunil Duggal, CEO, Dabur India, Mr Ajay Kumar Vij, CEO, Dabur Pharma and Mr V Senthil Kumar, of i-flex Solutions b.v (Dutch subsidiary), booked profits on their holdings in the period from January 2 to 7. All these executives seemed to have timed their sales quite well to peaks in stock prices. Amongst well known names, a constituent of the promoter group of Suzlon Energy sold 65,100 shares, representing 0.02 per cent stake, just before the onset of the correction.

Only ten were buy trades, which indicates that a majority anticipated a decline in prices. A stake hike by the promoter of Oriental Trimex on January 8 and purchases by the chairman of Gateway Distriparks, who acquired 44,200 shares on January 7, were exceptions, where insiders bought shares just before prices reversed sharply. However, insiders who acquired shares just before the crash would today be sitting on notional losses of 35-47 per cent if they were to sell the newly acquired stock.

Crash landing

However, in a falling market, there seemed to be no material difference between the mentality of insiders and small investors. Like many retail investors, insiders too appeared to hit the panic button as the market fell ferociously with total sell trades (15) outnumbering the buy ones (11) during the rout. However, the fact that sales were timed to an early phase in the fall probably helped save these insiders a packet or two!

Insiders who sold during the correction have managed to save an average 30 per cent of wealth, by exiting those shares. A promoter of Crazy Infotech sold 5,000 shares on January 10 at around Rs 206 each; the stock is now trading at Rs 47!

Just as some insiders were spot on in timing their sales just before the crashsome others waited patiently for the crash to run its course before shoring up stakes in their companies.

A Director of Jaiprakash Associates bought some 2,000 shares on January 24 at around Rs 370 – a cheap entry point – as it stayed above Rs 440 levels even during the correction phase. This indicates that sometimes it pays to wait for turbulence to end in the market and then make fresh moves after figuring out a secular trend in the stock. This holds true even if one is a risk-taking investor.

Long-term investments

The Indian promoter of Gateway Distriparks Ltd. (GDL) waited until January 21-22 to buy 8 lakh shares of GDL through an unlisted company- Prism International. The weighted average price of the stock had declined to around Rs 110 during January 21-22, compared to Rs.150-160 levels a scant seven days ago. The stock has now steadied in the Rs 106-110 band, reducing notional losses for the buyer.

The promoter of K S Oils persistently bought the stock through the correction from January 14-16 and then returned on January 21-22, in the process mopping up 28.78 lakh shares or a total 1 per cent stake in his own company. Due to his transactions being spread out over many days, the stock would have been accumulated at around Rs 92-93 levels.

This is far less than the high of Rs 142 per share hit by the solvent extraction company in January itself. As many long-term investors believe, if you like a company then a lower price is an opportunity to accumulate.

Like him, other promoters and key company executives also accumulated BSEL Infrastructures, Lime Chemicals, Rajshree Sugars, Garnet International and Ruchi Soya during the corrective phase.

Sitting on notional losses if they were to immediately sell those shares, these insiders seem ready to endure some temporary pain.

Tenable trends

Just two days after the corrective phase for the market as a whole took a breather, insiders continued to sell off stocks as the share prices of select companies continued to gravitate southwards. Gujarat Lease Financing, International Hometex and diversified major ITC saw sell trades from insiders in the January 23-25 period.

None of the large-caps saw any insider trades during these periods, which is noteworthy, as several frontline stocks suffered sharp reversals during this phase.

The possibility of heavy price swings might have prompted promoters as well as key employees to employ a ‘wait and watch’ approach. Our analysis reveals that generally insider trades happened in micro-caps or mid-caps.

As far as sectoral trends are concerned, smaller financial stocks like V B Desai Financial Services, VLS Finance and Wall Street Finance became very active before the crash with the promoters turning bearish on their stocks.

In metals (ISMT and Nissan Copper) and logistics (Gateway Distriparks and Patel Integrated), promoters or other insiders remained persistently bullish about the prospects of the companies, steadily buying their shares.

The Information Technology space saw quite a few instances of insider selling in small companies such as i-Flex Solutions, Northgate Technologies and Contech Technologies. These ‘sells’ have resulted in savings of 31 per cent, on an average, for the sellers.

Key pointers

Investors should watch out for a stream of insider sells in small and medium stocks, which might indicate that a decline may be round the corner.

Although the insider trading disclosures are not always immediately submitted to the stock exchanges, investors should keep a close watch on large deals involving promoters or top management buying/selling stocks.

Web site link for keeping a tab on insider trades:- http://corpfiling.co.in/InsiderTrading/InsiderTrading.aspx (You can also use the Advanced Search option in the left pane of the window to select various periods, exchange etc.) Leading financial dailies also carry selected insider trades in the stock quotes page(s).

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Is there a pattern in insider trades?