When retail investors analyse a stock, they typically obsess over P/E ratios, operating margins, and year-on-year growth in financial metrics. They tend to dive deep into business models and growth projections and dissect the products the companies sell. Yet, we often overlook the most crucial part of the analysis: the company’s management.
Yes, the wise investors study the people behind those companies before making their decision. Because businesses don’t fail due to poor products, they fail due to poor decisions, disguised as strategy, diversification, or ambition.
In long-term investing, understanding the promoter’s mindset, capital allocation decisions, and ethical compass can matter more than the company’s numbers.
In India’s listed space, we’ve seen it all: funds siphoned to privately held entities, falsified books that pass audits year after year, deliberate stock price manipulation, shell companies used for round-tripping, and so on.
In theory, we’re invisible owners of the companies whose stocks we hold. But in practice, our ownership is too small to matter. An investment of ₹1 lakh in a company with a market cap of ₹1 lakh crore (large cap) gives us 0.00001% of the pie. Decisions are not made by us. We can attend the AGM, sure. But we do not get to steer the ship.
That’s why we’ve come to believe this:
For a retail investor, a stock is not merely part-ownership in a business. It is faith in the management, trust in the promoter, and a blind partnership with majority shareholders whose interests may or may not align with yours.
Here are 5 steps you must follow for the qualitative analysis of a company’s management.
1. Complicated Corporate Structure (Birth of RPTs)
When a company has 50–60+ subsidiaries, domestic or overseas, it opens the door to opacity.
Multiple subsidiaries often escape proper audits. They introduce capital allocation pitfalls, foreign exchange gains or losses, and create a financial maze that analysts usually struggle to navigate. Analysing even the standalone financials is hard enough; diving into dozens of subsidiary reports becomes nearly impossible.
This complexity can give rise to Related Party Transactions (RPTs):
— Material loans given to privately held entities every year
— 50–60% of sales or purchases routed through sister companies
— Inflated sales receipts and ageing receivables
All of this can enable earnings management and doctoring of the numbers. Yes, in some cases, a large number of subsidiaries is business-driven. But quite often, it could also be a smokescreen.
We always prefer a simplified corporate structure with just a few (5-10) subsidiaries over a tangled web.
2. Personality Sketch of the Promoter (Capital Misallocation)
Is the promoter’s track record built on a breakthrough or a series of well-executed wins?
Has the business scaled profitably without compromising product or service quality?
Has the promoter shown resilience during economic downturns or rising competition, protecting market share?
Now shift the focus to capital allocation.
If the promoter is floating multiple businesses or acquiring unrelated ones, say, a major construction equipment supplier company launching an NBFC or a trading firm, that’s not diversification. That’s distraction.
Consider these real-world examples:
— Quess Corp acquiring a football club.
— Essel Group (Zee Entertainment) jumping from media to infrastructure, leading to a debt crisis.
— Future Group dabbling in insurance business, lost direction and focus.
Such moves raise the core question: Where does the promoter’s conviction really lie?
Check promoters’ directorships on other companies on online platforms (ZUBA Corp). In business, focus is a superpower, and promoters who chase everything often end up building nothing.
3. The Guidance Trap: Over-Promotional CEO Persona
In investing, charisma is more dangerous than incompetence, especially when it comes dressed as quarterly guidance.
Some CEOs appear on TV after every quarterly result, glorifying the promoter story, flaunting large order books, revising growth targets, and confidently forecasting 20% revenue and 35–40% PAT growth. But when storytelling becomes the product, performance is often compromised.
It drives up stock prices and pulls in retail investors, and when reality falls short, the numbers are adjusted to match the street’s expectations.
Eventually, when the mask slips, targets are missed, ratings fall, and stocks crash. Real leaders don’t hype next quarter’s story. They quietly build the next decade. Look for management that underpromises, overdelivers, and thinks for more than 5 years.
4. Past 10-year Management History
Before buying any stock, learn about at least the past 10 years of the management’s history.
Has SEBI ever taken action for accounting fraud, incorrect financial statement filings, non-compliance, missing cash flow statements (Rajesh Exports), or late financial disclosures?
Have there been dubious product claims like miracle vaccines or vague foreign tie-ups (Urja Global, Zacobite)?
Has the company misled investors with public buyback promises only to cancel them at the board meeting (PC Jeweller)?
Has there been misreporting of financials or GST fraud? (Manpasand Beverages)
Also, check for frequent accounting restatements, or income tax raids on the company or its subsidiaries.
Most importantly, track the frequency of KMP (Key Managerial Personnel) exits. If CEOs, CFOs, or directors keep resigning every 1–3 years (IRM Energy), that’s definitely an amber flag.
Frequent leadership churn signals instability. Something deeper may be wrong.
You can start inculcating AI as your daily research tool.
“Has SEBI or any regulator taken action against [company name]?”
5. Shareholding Pattern and Board Composition
A high promoter holding is generally a positive sign; it signals skin in the game. If promoter ownership falls below 40–50%, examine who else holds influence.
Institutional (FII or DII) holding reflects conviction. It also acts as a counterweight, forcing promoters to pursue profitable projects and align with shareholder interests. In many ways, institutions are the invisible enforcers of governance.
We always prefer a soundboard with over 50% independent directors. You can also check KMP’s LinkedIn profile to see their relevant experience and academic background.
Avoid companies in which the chairman sits on the audit committee. This critical function should be performed entirely by independent directors.
Also, stay cautious of deep family conflicts among promoters (Raymond Lifestyle). Internal disputes have a way of spilling over and damaging business continuity.
One clear red flag: promoter share pledging.
When 40–50% or more of promoter holdings are pledged, like recently in the case of IndusInd Bank or Gensol Engineering, it becomes a financial time bomb. Even a pledge under 5% requires scrutiny for material impact.
Be mindful of promoter behaviour at market peaks. If they frequently sell their stake, raise capital through private placement, or offload prized subsidiaries to repay debt, it may signal short-termism, not long-term conviction.
Conclusion
In long-term investing, the biggest threat isn’t volatility—it’s not even a temporary dip in earnings. It’s management risk, the quiet choices made in boardrooms.
Management quality is the invisible lever that decides whether your investment compounds quietly for decades or silently erodes behind doctored numbers and broken promises.
That’s why, in Finology 30, every stock undergoes thorough and diverse methodologies of corporate governance and promoter analysis—to minimise long-term investor risk and avoid management-related pitfalls.
Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
