How promoters having significant holdings can manipulate their company's stock prices ?

Recently Adani Group has been in the news after Hindenburg Research accused it of manipulating their stock prices. Whether the Adani Group has really done so, is a matter of regulatory probe. This article attempts to explain to the common investor, how this can be easily done by any promoter who holds  significant shares of his own company. And why do some promoters do it ?

Imagine you are a promoter of a publicly listed company whose current share price is Rs.100 and you happen to own 90% equity, say, 10 crore shares. So, the current market cap of your company is approximately Rs.1111 crores and you own Rs.900 Cr of it. 

Now, you want to expand your business and need a loan. So, you approach a bank. The banks will ask for collateral where you have the option to pledge your shares. Now, the quantum of loan you can secure will be more if your market cap is higher, since, it means a higher collateral for the bank. This is where the limited public shareholding, in this case 10%, comes to your help. 

All the common shares are not traded in the open public market. It is only that 10% that gets traded which amounts to roughly 1.1 crore shares. Now, you reach out to a friendly broker who agrees to buy your shares from you at a higher price. 

Lets, do some calculation here. 

Say, you put in Rs.1 Cr and you end up buying your own shares from the secondary market at the current market price of Rs.100. You immediately sell it to the friendly broker at a small premium, say Rs.101. You need to compensate the broker for taking this risk, hence, you need to pay an additional, say, Rs.25 lakhs to the broker. All this buying activity will trigger an interest in the company. Hence, the broker will in turn try to sell these shares to the common gullible investor. This means that your market price will further increase, may be to Rs.104 - 105, even higher. So, your holding i.e. 10 crore shares now is  Rs.1050 Cr which means a gain of Rs.250 Cr. You will incur some expenses, but in the bull trend thus created, you might even make an extra small profit. 

So, by spending Rs.15 lakhs you gain around Rs.250 Cr. 

Hence, companies with a limited concentration in holding can play this dirty game of propping up their own share prices significantly by spending much smaller amounts of money.

Of course this is a gain in paper which will translate to a higher amount of loan from the bank thereby funding your business expansion. 

Whether the Adani Group really resorted to such practices will be known in future but there is no doubt that their share prices had an abnormal growth in the last few years. It is too good to be true, especially in a jugaad economy as ours.