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Sunday, March 15, 2009

About Stock Market News and Insider Trading - the Bharti case

In a blog post on Feb 1, '09, some guidelines about how to disseminate stock market news and financial news into 'good', 'great', 'bad' and 'worse' categories were provided. I had also given suggestions about how to form buy or sell strategies using such categorisation.

One of the notable stock market news items last week (on Thursday, Feb 12, '09) was the announcement that Manoj Kohli, CEO and Joint MD of Bharti Airtel had disposed off his entire stock holding in the company, comprising some 123,000 shares worth more than Rs 7 Crores.

53,000 shares were sold on Mar 6, '09 and 70,000 shares were sold on Mar 9, '09. By stock market standards, these are not huge numbers. Kohli's holdings represented less than 0.01% of Bharti Airtel's equity capital, and he isn't a founder-promoter of the company.

But the stock market took the news badly and the stock tanked by more than 6% on Thursday when the Sensex rose by more than 2%. The stock remained under pressure even on Friday and gained only 1.5% whereas the Sensex gained nearly 5%.

There were rumours of the CEO's imminent exit from Bharti, which Kohli denied. He also claimed that he held 180,000 stock options, some of which had already vested. But the near simultaneous announcement of the promotion of Sanjay Kapoor, from President - Mobile Services to a newly created post of Deputy CEO, only strengthened the rumour-mongers.

Chairman Sunil Mittal later wrote to the company's institutional investors clarifying that Kohli was very much an integral part of the Bharti top management; had taken Mittal's permission to sell his holdings; that ESOPs were meant to enrich employees; and top level reshuffles are routine affairs at Bharti.

Some analysts also pointed out that the reason for the stock's fall had less to do with Kohli's resignation and was more due to the announcement by TRAI about reduction in termination charges that telecom providers pay each other for local calls to 20 paisa (from 30 paisa earlier).

With a user base of 90 million plus, Bharti's top line may get affected by about 4% and EPS by 1% if they do not reduce their tariffs proportionately. If Bharti reduces tariffs proportionately, top line may go down by 8% and EPS by 11% (as per estimates of Macquarie Securities).

So what should investors and potential investors do? To answer that question, we must first analyse the issues in 'insider trading'.

Insider trading means buying or selling of a company's shares or debentures or bonds by individuals who may have privileged information about the company before such information is made public. In many countries, including India, it is perfectly legal for company insiders like executives and directors to buy or sell  company securities as long as it isn't done based on non-public information.

How can investors find out if any insider trading is above board or not?  A simple thumb rule is to look at the quantum of sale. (We will only discuss about insider selling. Insider buying is usually a positive, particularly in a bear market, because it demonstrates faith in the future of the company.)

National Stock Exchange records reveal that Bharti Airtel director Akhil Gupta has sold more than 90,000 shares over the past three months. Company Secretary Vijaya Sampat sold 16000 shares in Dec '08. But such information didn't affect Bharti's stock price in a major way.

Why so? Because 16000 shares is considered 'normal' profit booking. What about 90,000 shares - which is not much less than Kohli's 123,000? This is where it gets interesting.

After selling 90,000 shares, Akhil Gupta's balance holding is nearly 11 lakh shares! That means he sold less than 10% of his holdings. Whereas, after selling 123,000 shares, Kohli's remaining balance holding is zero (well, 180,000 of mostly unvested stock options).

There was also a rumour that Kohli wants to move out of Gurgaon and buy property in New Delhi. In which case, he could have sold a smaller amount that would have been enough for a down payment.

Inspite of Kohli's and Mittal's denials, there seems to be more here than meets the eye. So is this bad news or worse news? Only time will reveal that.

Bear markets have this ability of inducing reticence among promoters who are otherwise ready to blab away about their company's brilliant outlook. Bad news gets revealed in dribs and drabs.

My hunch is that there may be worse news to follow. Kohli may have done what Satyam top executives did in Dec '08. Bail out before the really bad news hits the market. I don't expect that Bharti Airtel is involved in any Satyam-like fraud. But isn't it better to be safe than sorry?

My advice to potential investors is to wait for the Bharti Airtel stock to get derated. Alternatively, if every thing turns out hunky-dory, enter when the market shows signs of turning around.

Existing investors can hold on with a stop loss at 480. If 480 doesn't hold, Bharti can go to 420.

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