Should promoters crystal-gaze fair price?

KS Badri Narayanan Chennai | Updated on May 09, 2020 Published on May 09, 2020

Tesla share price crashed after Elon Musk’s ‘costly’ tweet

Just a single tweet from maverick founder Elon Musk sent the Tesla Inc stock price crashing. On May 1, Elon Musk, co-founder and CEO of Tesla, from his twitter handle @elonmusk said “Tesla stock price is too high imo,” which few owners of companies even think, leave alone say in the public domain.

After he said that the current market price of Tesla was too high in his opinion, the share prices of Tesla slumped wiping out almost $15 billion in market cap. From their April 30 close of $781.88, shares of Tesla slumped to $683.04 on May 1 on Nasdaq, after the tweet. The share price, however, has since recovered.

This is not the first occasion the share price of Tesla has swung wildly on Elon Musk’s comments. In fact, he is (in)famous for market moving tweets on several earlier occasions.

One of his ‘April Fool’ tweets had invited the wrath of investors and regulators — ‘‘Elon was found passed out against a Tesla Model 3, surrounded by ‘Teslaquilla’ bottles, the tracks of dried tears still visible on his cheeks. This is not a forward-looking statement, because, obviously, what's the point?... There are many chapters of bankruptcy and, as critics so rightly pointed out, Tesla has them *all*, including Chapter 14 and a half (the worst one).”

As usual, Musk’s latest tweet has kicked up a lot of debate about the share price a company should trade at and the role of CEOs.

Cry after bear onslaught

Have any Indian promoters or CEOs have been as open or vocal in airing their views about the stock price? Yes. There are several occasions.. But that has usually happened when their share price crashed. A lot of CEOs from Anil Ambani to Anil Sanghvi; YES Bank to Core Education; GTL group to Dish TV; and others had moved SEBI whenever their share prices were hammered by bears.

All these raise one question: what is the fair value of the company and how do we get to know? One common strategy adopted by the companies to indicate their fair value is a buyback offer. Whenever they feel the stock price has been hammered beyond their perceived fair value, companies come out with buyback offer not only to stabilise the share price but also indicate to investors that the share is below fair value.

Another way is making private placements to institutional investors or PE investors at a much higher price. Marquee investors do not mind paying higher price over the prevailing rate, if they get a good quantity of shares otherwise not available for them from open market.

But is it right for a promoter or an insider to declare at what price his/her company’s share should trade? CEOs and owners should concentrate on their business and its development and working towards enhancing value to their shareholders instead of watching what the prevailing share price of his/her company on a daily basis. If they concentrate on developing their business, the share price automatically captures the growth. However, sadly, some top honchos of India Inc tend to watch their share price graph more.

It is better to leave crystal-ball-gazing on share price to market participants. Each and every individual should be able to assess the fair value of a stock based on the information he has at the time of entering the deal.

Lastly, though regulators have enough checks and balances, promoters should not indulge in talking up or down the share price to buy or sell stock for his/her own benefits.

Published on May 09, 2020

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