Correction ahead? Small investors seem to believe so

Retail shareholding fell in three out of four companies in the three months to September 30, an ET study shows, indicating that small
investors are cashing out in anticipation of a correction in stock prices.

The benchmark Sensex of the Bombay Stock Exchange
(BSE) has more than doubled in the past six months, buoyed by rising inflows from foreign funds and improving corporate performance.

“The sharp market rebound, with many stocks rising up to 3-4 times within a short time, could have made retail shareholders pull out their investments fearing a sudden drop in prices,” said DD Sharma, senior vice-president of research (retail) at brokerage house Anand Rathi Securities.

Retail investors are individuals who hold shares worth less than Rs 1 lakh in any listed company. The study covered shareholding of 1,000 companies for which latest share ownership data are available.

The companies that registered over a 15% drop in their base of small investors last quarter include mining firm Sesa Goa, whose scrip has risen over five times after hitting its lowest level in January. The number of small shareholders also declined in companies such as Indiabulls Real Estate, JP Hydro and HDIL, whose scrips have seen a 3-6-fold rise in prices from their lows in January.

In contrast, among the large companies, Reliance Industries (RIL), Divi’s Labs, Glenmark Pharma, Hero Honda, Adani Enterprises, United Phosphorous and United Spirits saw an increase in the shareholder base last quarter.
In the process, RIL has overtaken Reliance Natural Resources (RNRL) as the company with the second-largest investor base behind Reliance Power.

This is also the first time since the demerger of various businesses owned by RIL more than three years ago that the shareholder base of RIL has exceeded that of RNRL. But in the case of RIL, the 64% jump in the number of retail shareholders to 3.45 million (3.6 million of Reliance Power) was largely due to the merger of Reliance Petroleum (RPL) with the company that has since then announced bonus shares.

As a result of the merger, each shareholder of RPL got shares of RIL. At the end of June 2009 RPL and RIL separately had total shareholder base of over four million which has now come down to 3.5 million. Given that many RPL shareholders could own shares of RIL, the exact change in the shareholder base of the two firms in the merged entity could not be ascertained.

The ET study reveals a sequential decline in the proportion of companies which attracted new retail shareholders over the past four quarters. For instance, between September 30 and December 31 last year, when the market had tanked after US investment bank Lehman Brothers declared bankruptcy, 50% of the companies saw an increase in new retail investors.

This dropped to 45% during the three months ended March 31, 2009, and further declined to 35% in the quarter ended June 30. For the three months ended September 30, just 25% of the 1,000 companies in the sample, attracted new retail investors despite the markets continuing to rise. As against this, 75% of the firms saw their retail investor base decline last quarter.

“Many people who owned close to 100-200 shares of a mid cap company sold out completely in September, which could be due to festival time when these small investors might have encashed to spend. We have been dissuading many of our retail clients from taking fresh positions as valuations looks stretched in many cases,” said a senior executive with a Mumbai-based broking firm.