Why did Paytm shares sink by 10% in hours today?

Paytm's share prices have been declining since the last one year. But the news that promoter SoftBank is selling 4.5% stake out of its 17.5% in Paytm led to its share prices sinking by 10% in a matter of hours on Thursday (November 17).

If you invested in Paytm in the last few days based on someone's recommendation or assuming that you would be lucky, well here's some advice: Stay away from this recommender and also pray for better luck.

Paytm share prices declined  plunged on November 17, 2022, after Paytm's prominent promoter firm SoftBank Group sold about a 4.5% stake in the company. 

Why did the promoters sell the shares? As per SEBI's rules and guidelines, promoters of a listed firm need to hold their shares for at least 1 year post-listing, before they can sell off their stake. Since Paytm got listed on the stock exchanges on November 18, 2021, the mandatory one-year lock-in period for promoters ended on November 17, 2022. Hence, shares were sold on November 17, 2022.

What message does it send? Investors generally look at the reputation of the promoters and the management of the company while investing in a company. But when the promoters itself sell their stake in a company, it usually indicates the management's lack of confidence in a company to do well. Generally when promoters sell their stakes, the market follows and sells their stakes too, which leads to share prices to dip. 

Paytm's share price trajectory: Paytm's share price has been consistently falling since the IPO launched 

Did the promoter make money on his investment? In 2017, SoftBank invested at least $1.4 billion (about Rs 11,423 crore) in Paytm. As of September 30, 2022, it held a 17.5% stake in the company of which it sold a 4.5% stake this week.

In August this year, it marked down its investment in the firm by $400 million (Rs 3,263 crore). Since Paytm's shares have sunk by about 65% in the last 1 year, SoftBank's sale of shares might fetch the Japanese firm about $200 million (about Rs 1,629 crore).

To conclude, here's the lesson: Companies' promoters usually have to follow a lock-in period on their investments and the lock in period ends in a year from the date of listing. Most big investors usually pull out their money and sell their stake when the lock-in ends and it has been observed that this sale usually affects the stock market based on how the company is doing. Since Paytm stocks have generally been declining, the sale of shares sunk it even further. So the next time you think of buying shares of a company that was listed in the last 12 months, also see when the lock-in period ends.