A couple of quick announcements before I begin today’s post.
1. Masterclass – Thinking Clearly in A Market Crisis: I am hosting this Masterclass tomorrow, Saturday, 19th April 2025, 7 PM IST Onwards. The underlying idea is to help you deal with the messiness of market panics and crises, so you can protect your wealth, peace of mind, and long-term goals. I had 100 seats available for the Masterclass, and now just 20 remain. Click here to know more and join.
2. Relaunch of Value Investing Almanack: I have relaunched my premium newsletter, the Value Investing Almanack (VIA), which subscribers have called “…the best source in India on Value Investing, for both beginners and experts.” Click here to read more and subscribe to VIA at a special launch price (available only for the first 100 subscribers). Also, if you wish to check out the March 2025 VIA issue before deciding to rejoin, click here to download.
The Investor’s Guide to Spotting Bad Promoters Before It’s Too Late
We Indians love stories. From Ramayana to Reliance, we’re a country moved by narratives. And when it comes to investing, perhaps no story sells better than that of the visionary promoter — the larger-than-life figure who claims to be solving big problems and creating generational wealth for shareholders (don’t ask, which) in the process.
Now, I don’t mean here that all such stories that Indian promoters tell us are bad. Some are genuine. But most are just well-packaged, and a few are designed to do just one thing — take you for a ride. And when you peel back the layers of some of these stories, what you often find is not innovation or integrity, but obfuscation, opportunism, and in some cases, outright fraud.
The problem isn’t that we don’t see it, but that we often refuse to. Because hope, in the market, tends to speak louder than evidence. Sometimes, ironically, hope becomes our investing strategy.
One recent example that captured attention, and then disillusionment, is Gensol Engineering. What started as a promising solar and electric mobility play, soon began to show cracks that we have seen far too many times before. From questionable related-party transactions to preferential allotments at steep discounts, from opacity in financial disclosures to the exits of board members and auditors, the Gensol case has unfolded like a slow-motion version of a promoter script that many of us have watched before. And yet, it worked, until it didn’t.
The crux of the fraud was that public money was being used in ways that disproportionately benefited entities linked to the promoters. The complexity of these transactions was high, but the intent, as it came to light, was painfully simple. The promoter was in the driver’s seat, but minority shareholders were just passengers along for the ride, and somewhere along the way, trust was left by the roadside.
Now, the problem isn’t just Gensol, and so I don’t want to delve much here. The real problem is systemic. Our markets are filled with examples where promoters have treated listed companies as private fiefdoms. Whether it’s Satyam, Yes Bank, DHFL, Karvy, or Religare, the playbook remains remarkably consistent.
The common thread is that of promoters who thought of the company not as something they were entrusted to build, but as something they owned entirely, including your money.
Float a few private entities. Use the public company to fund them. Keep disclosures murky. Keep the board compliant. Fire the auditor if they ask too many questions. By the time minority investors realise what’s happening, it’s often too late. The wealth has already been transferred, and the damage already done.
What’s more troubling is how we, as minority shareholders, have somehow convinced ourselves that a little bit of manipulation is okay. That if the stock is going up, everything else can be forgiven.
Ask around and you’ll hear things like, “Sab karte hain,” or “At least he’s growing the business.” And that’s the mindset that’s costing us investors the most. We don’t look for clean businesses anymore. We just look for those that are less dirty (the ‘lesser evil’).
If a promoter is cutting corners, lying in footnotes, or treating the company like his family’s piggy bank, it’s only a matter of time before something breaks. And when it does, it’s not the promoter who pays, it’s you and me, as a minority shareholder. Always.
And yet, it doesn’t have to be this way. There are Indian companies that play it straight (at the “centre of the court” as Buffett would have said). They disclose clearly, and treat minority shareholders like owners. These companies exist, it’s just that they’re not usually the ones making headlines, and their founders are not on business channels or podcasts with a million views.
Basically, what we need is a mindset shift. We need to stop asking, “How fast is this company growing?” and “What kind of return can this stock give?” and start asking, “How fairly is the business being run?”
That’s why I believe, more than ever, that management quality isn’t just one of the things to look at while analysing a company. It’s the thing. You can be off on your valuation. You can miss an industry trend. You can overpay a little. But if you’ve backed a crook or a smooth talker with no conscience, no financial model will save you. The numbers may look fine today, but the rot usually starts somewhere in the footnotes and the disclosures nobody reads.
We also need to stop pretending we’re victims. We’re not. We enable this system every time we run after the next hot stock or theme without asking basic questions, like:
- Who’s the promoter?
- What’s his track record?
- Does he have a history of treating shareholders well?
- Has he played this game before?
If the answer feels off, you don’t need a forensic audit. Leave the sunk costs of time and effort behind, and simply walk away.
How Do You Spot a Shady Promoter Before It’s Too Late?
This raises a natural question — is there anything in the numbers, announcements or regulatory filings that can help you spot a promoter who’s not playing clean?
Well, as per my experience and understanding, while no metric is perfect, there are a few signs that often show up early, if you’re paying attention. And, by the way, they will not show up in the headlines, but in the annual report footnotes and some patterns.
For example, frequent related-party transactions, especially when the company is selling goods or services to entities owned by the promoter’s family, should immediately raise eyebrows. These deals may be legal on paper, but they often signal where the real value is being siphoned. Similarly, if the promoter’s private companies are regular suppliers, landlords, or “consultants” to the listed entity, know that something is off.
Then, watch out for large loans or advances to “others” on the balance sheet, especially when the recipient isn’t clearly named. That “other” is often another pocket of the promoter’s trousers.
Also, keep an eye on exits of auditor and board members. If independent directors or auditors resign without clear reasons, or if they’re being rotated every couple of years, that’s often the canary in the coal mine.
One big red flag is when the company shows strong reported profits but consistently weak or negative cash flows. This disconnect is the classic signature of accounting games. If cash isn’t following profits, it’s time to question what those profits really represent.
Then there’s the pattern of frequent equity dilution through preferential allotments, which is often done at prices lower than market, and to ‘friendly’ parties. If the promoter is issuing more and more shares while the story is heating up, chances are you’re funding the party.
Lastly, look at promoter share pledging. While pledging isn’t wrong by itself, high levels of pledged shares combined with erratic corporate behaviour is a dangerous combination. If the stock falls, the promoter could lose control, and you could lose your shirt and everything else.
Now, none of these signs should be viewed in isolation. But when you see a few of them together, don’t look away. Don’t dismiss it as “business as usual.” Because when the promoter is laying traps, it’s usually the minority shareholder who walks into them.
Judge Character More Than Cash Flows
Investing in India requires a thick skin and a sharper eye. You can’t just look at revenue or profit growth. You have to understand capital allocation. You have to read between the lines in annual reports. You have to watch boardroom exits like you’d watch a fire alarm when your house is on fire. And most importantly, you have to judge character, which is the hardest thing to quantify, but the most important thing to understand.
A promoter who cuts corners in good times will gut the business in bad times. And one who builds on trust will protect the business like it’s their own.
Here, I remember this quote from Thomas Phelps’s 100 to 1 in the Stock Market:
Remember that a man who will steal for you will steal from you.
The irony is that we know this deep down. We all have stories of that one stock where we ignored the red flags and paid the price. We also know that the best compounding often comes from clean businesses that investors often forget while chasing that ‘pot of gold’ at the end of the rainbow.
It’s high time (again!) we start seeing corporate governance not as a side dish, but as the main course. Because in India, where promoter control is often absolute, governance is not optional…it’s everything.
A promoter who treats the business like their personal bank account is never going to create lasting value. You might make money for a while when the tide is rising, but you’ll never sleep well and may find yourself naked when the tide goes out.
Finally, if there’s one hard-earned truth in Indian investing, it’s that the promoter is the business. If you can’t trust them, nothing else matters. No projections matter, not the industry tailwinds, not even the financial statements. Because those can all be massaged. But character, once lost, rarely comes back.
Peter Bernstein wrote in his brilliant book Against the Gods:
Survival is the only road to riches. Let me say that again: Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.
In a market like ours, trying to protect yourself from the damage that unscrupulous promoters can cause isn’t just smart, but essential for survival.
It’s rational to avoid businesses where integrity is treated as optional and governance is made a mockery of.
What isn’t rational is believing that you can outsmart a promoter who’s already three steps ahead, and especially when your own guard is down, and your questions are silenced by greed or FOMO.
So, learn to say no. Learn to walk away from ‘fishy’ promoters. And above all, learn to respect the discipline of those who play by the rules, even when no one is watching. That’s where real compounding happens.