A promoter of a company is someone who has control over the affairs of the company, directly or indirectly whether as a shareholder, director, or otherwise. (Link)
Ideally, the promoter is someone who has been involved in the organization from the initial days to the current day. Owing to this, the promoter has a lot of heft within the board and in the market as his wisdom, experience and foresight will decide where the organization goes from the present status.
Under certain circumstances, as stated below, the promoter lowers their holding
- In order to raise money (through equity/debt funding or IPO)
- In order to comply with the regulations of the day (eg. In India, RBI allows private banks’ promoters to hold a maximum of 26%) (Ref)
- In order to bring in a strategic investor (eg. The Government of India sold off its major stake in IDBI Bank to Life Insurance Corporation(LIC) in order to stick to its roadmap of bank privatization) (Ref)
Considering this, it is crucial for the investor to understand the promoter and whether he/she is in it for the long haul or looking for an early exit by selling their stake and leaving investors in the lurch. So, it is best to have promoters having a 25–75% of stake in the organization. This will not ascertain growth and stability but at least it will show that the promoter will also take a cut in returns for his/her stake if the organization does poorly.
A very low (< 10%) and highly pledged (> 15%–25%) promoter holding is a red flag. These kinds of stocks should be at best avoided (except in certain cases).
Hope this helps