Global Outlook

Shareholding pattern reveals how the shares of a company are divided among the various bodies that constitute its ownership.

Contributed by Nirmal Bang

By Nirmal Bang

Before buying any stock, we research the company from all possible angles.  We take into account the company’s profit and loss, sales and debt, among other things and thus, try to gather as much information as possible about the business into  which we are going to invest our hard-earned money so as to avoid nasty surprises in the future.

This is also important because when we buy a share, we are not just buying a piece of paper, but also becomin  a part owner of the business to the extent of the shareholding percentage.

Therefore, isn’t it good business sense to try and find out who the other partners in the business are, what percentage of business is owned by whom and how does their action affect the business, the share price and ultimately the profitability? But then, how do we come to know who the other illustrious brethren  really are? Just as we have a family tree, every business has a family tree, which is known as the shareholding pattern of a company.

It is this shareholding pattern that reveals how the shares of a company are divided among the various bodies that constitute its ownership. You can find this information on most financial websites on a quarterly basis, on a company website or in the annual report of the company.

Let us now study the general make-up of a shareholding pattern.

There are two main entities - promoters and the promoter group  and the public.

1. Promoter And Promoter Group

These are basically people who have Be started the company in the first place. Promoters can be both domestic as well as foreign. Even relatives of promoters who own shares of the company are labelled as promoters of the company.

There is a small section under promoters holding in shareholding pattern known as pledged shares . Companies have to disclose the shares that have been pledged by promoters as collateral against debt. Pledged shares have been in the limelight for all the wrong reasons in recent times.

2. Public

These are basically the non-promoter group comprising institutions, foreign institutional investors (FIIs), domestic institutional investors (DIIs), banks, insurance companies, mutual funds, corporate bodies, individuals, etc.

Companies also have to disclose the list of entities other than the promoter group who hold more than 1% of the total share capital. Individual investors like you and me also form a part of the total public shareholding of the company.

Now that we have seen what the different bodies that make up the shareholding pattern of a company are, let us analyze each entity and the implications of its actions on a company’s performance.

Before we begin, remember that studying a single standalone shareholding pattern will reveal very little information.

Only when the shareholding pattern is  compared on a quarter-on-quarter (q-o-q) basis or a year-on-year (y-o-y) basis, will we get the real picture. Let us see how.

PROMOTER SHAREHOLDING

They are the most important entities of any shareholding pattern.

Any higher percentage stake in a  company by its promoters is generally  viewed positively. If a high promoter stake is more or less steady or on the rise on a q-o-q basis, it is a signal that the overall performance of the company is expected to be good, going forward and that the promoters have confidence in their company.

However, one should try and understand the exact nature of stake increase. For example, if the company has floated the rights issue but its investors have not subscribed to it fully, then the promoters may buy the remaining shares themselves to save the issue.
 
This is actually a negative characteristic, which shows that general investors are not confident enough about the performance of the  company to put their money into it and that the rise in promoters’ holding was not originally intended.

Conversely a lower promoter  holding is viewed negatively as it shows that the promoters themselves do not have any faith in their company and it indicates an underlying problem in the company.

Again one should consider the reasons for the lowering of promoter holding. For example, if the holding has gone down due to the issuance of fresh shares under employee stock option plan (ESOP), it is a not such a bad move because it aims at retaining, rewarding, and motivating its existing staff to perform better.

At the same time a very high promoter holding percentage is also not a healthy sign. The risk of such high ownership is that the promoters can take decisions to benefit themselves without taking into consideration the overall interest of the shareholders.

If the promoters are offloading their shares in the secondary market, it is a very dangerous signal because the promoter group is like the captain of a ship and if the captain starts abandoning the ship, then the chances that the ship may sink become extremely high.

PUBLIC SHAREHOLDING

Foreign Institutional Investors

Foreign Institutional Investors are quite a favourite among most equity analysts and researchers.

FIIs represent the group of people called smart money and if they feel a company is worth investing in, then obviously the common investor thinks that he would do well to follow their footsteps.

The rule of higher the returns, higher the risk applies here also. If FIIs decide to exit their holdings, then they offload in huge quantities leading to a large fall in the stock price in a very short span of time taking the common investor completely by surprise.

But just as in the case of promoters, FIIs selling their stake does not really mean that the fundamentals of a  company are always bad. This selling may merely bu due to problems in their home country, their political and economical situations etc.

Domestic Institutional Investors, Mutual Funds and Insurance Companies

If a company has many funds actively holding it, it means that there is a  general view that the outlook for the company is encouraging and it is a positive signal for investors.

Most of these institutions have experienced managers who track these companies very minutely and they handpick these stocks in their portfolio after very careful and stringent tests. Hence, investors are always on the lookut for such domestic pickings.

But here too fi these DIIs hold a sizeable stake, then any selling on their part will cause the stock price to  plummet fast. This offloading may be due to redemption pressure or other intrinsic causes and not nceessarily due to imcompetence of  companies. Hence, one should be vigilant.

Individuals

Individuals like you and me numer in thousandsor lakhs and form a part of the shareholding pattern. But buying and selling of shares on a  singular basis by us does not cause any ripple in the stock since the quantum of shares owned by each is miniscule when compared totally.

Pledged Shares

This brings us to that small inconspicuous column in the promoters holding known as pledged shares. Over the past couple of months, pledged shares have emerged as the clear willain that is eroding investor wealth by almost 50% to 60% within no time.

Let us try and understand what these pledged shares are and why it is such an important component of a shareholding pattern.

These are shares givern as collateral against loans by promoters to financial institutions such as banks or NBFCs to raise funds for personal or company needs.

Pledging of shares is viewed negatively as it means that a company is  having difficulty raising funds through the normal route.

These loans generally have a margin requirement of 2 to 3 times, which means that if the loan is for say  Rs.1 crore,then the value of the pledged shares with instituions would be  around Rs.2 or Rs.3 crores.

The lender has the right to sell the shares if the promoters defaults in repayments or if the pledged shares go  down in values.

Why are pledged shares dangerous?

If the share prices below a certain level in the open market, then the promoters are required to either make extra payment or bring in more share to pledge. But, if the promoter fails to do either one of the things, then the lender  has the right to sell the existing pledged shares.

In an already bearish environment, when lenders sell these shares in bulk quantities, panic sets in and the stock falls on heavy volumes with a resultant steep fall in the share price,  most often falling from circuit to circuit with very little chance for investors to exit. This is the reason why pledged are so dangerous.

But pledging of shares is not always a bad thing. When shares are pledged for raising funds for the betterment  of company, it is a positive step.

But if the raising of funds is for the personal need of the promoters, it should be taken seriously.  Therefore, always check the percentage of shareholding pattern for pledged shares of a  company before taking any investment decision.