In India, corporate insiders are unloading their stock at a breakneck clip, selling $12 billion in the first 10 months of the year. This is, per Investing 101 rules, a tell-tale sign that the market is overvalued.

To some degree, that’s the case in India, where shares trade at a 17% premium to those in the rest of the world. But there’s a silver lining here so potent that many in the market contend it outweighs the traditional bearish signals. By reducing their stakes in the companies they founded or manage, insiders are creating space for local and foreign institutional investors to amass the kind of sizable positions they have long been unable to build.

Nearly half of all publicly traded shares have been squirreled away by insiders, at a time when investors have begun to view India as a rare source of rapid growth in the global economy. These sales, the argument goes, will spur asset managers to pour more money into the $3.7 trillion market, supporting a rally that recently lifted the nation’s equities to a record.

“It’s more a problem of free availability of shares than the supply of money,” said Anand Radhakrishnan, who oversees $3.6 billion of equity assets at Franklin Templeton India. “India’s market has to become deeper and wider in terms of ability to handle large flows. This 50% ownership with promoters needs to come down,” he said referring to those who control the companies.

There are signs of that happening.

Founders’ holding in the NSE Nifty 200 Index fell to an average 48.1% at the end of September, the lowest on record, from 50.5% on Dec. 31, according to Prime Database. A chunk of the decline was triggered by stock sales from Adani family entities after a scathing report by Hindenburg Research in January expressed concerns over the founders pledging shares for debt.

Ownership by local institutions including mutual funds during the period climbed to a record 17.5% from 16.3%, while foreign funds’ stake rose to 21.1% — the highest in two years — from 19.9%, the data show.

Domestic investors soaked up most of the 1 trillion rupees ($12 billion) of sales, which are the highest in at least six years. Adani Group owners alone sold 393 billion rupees worth, as per Prime Database, making way for global funds such as GQG Partners LLC and Qatar Investment Authority to invest billions of dollars in various group firms.

Twin Star Holdings Ltd., a unit of London-based Vedanta Resources Ltd., in August sold 39.83 billion rupees of shares in Mumbai-listed Vedanta Ltd., as part of fundraising by billionaire Anil Agarwal’s miner to repay about $3 billion of dollar bonds coming due over the next two years.

Wanting More

Booming stock markets and, in some cases, the need to repay loans backed by share pledges, may nudge founders to sell down further, analysts said. Overseas investors have plowed more than $12 billion into Indian equities so far in 2023, the most in emerging Asia, according to the latest data compiled by Bloomberg.

Purchases by local funds and insurers have exceeded $18 billion, powered by a recurring gush of cash from savers.

“The current floating stock is not enough to feed investors who want to put money for the long term,” said Shrikant Chouhan, head of equity research at Kotak Securities in Mumbai. “Stake dilution activity will increase, which is good for the market’s health.”

The problem is the strong desire for control means management and ownership in Indian firms are often intertwined. While that leaves founders with plenty of skin in the game, high holdings constrict market depth and liquidity, notably in the small- and mid-cap stocks.

Even in some of India’s top companies, including software giant Tata Consultancy Services Ltd. and Adani Group’s flagship firm, owner stakes are near the 75% threshold, the maximum allowed under rules. For perspective, the proportion of shares not held by owners in developed markets on average exceeds 80%, according to Bloomberg Intelligence strategist Nitin Chanduka.

Still, “the narrative that in India liquidity is tied up with a few large caps is changing,” said Rakhi Prasad, investment manager at Alder Capital. “There is much more breadth in the market now.”

Analysts are hoping India’s rising weighting in global stock indexes will lead to a virtuous cycle that would ultimately encourage founders to dilute. The country is set to surpass China in the MSCI Asia Pacific Index over the next five years, according to Morgan Stanley.

This year’s insider sales also point to “a mindset change in India” as founders realize they can retain control of their companies with much less, said Avinash Bharti, India head of equity capital markets at JPMorgan Chase & Co.

“Most founders seem to be getting quite comfortable with this notion,” he said.

--With assistance from Chiranjivi Chakraborty.