The shareholding pattern of a company gives you insight into ownership, helping you identify entities with large stakes.
The end of every quarter signals a flood of announcements by companies declaring how they have performed for that quarter. But sales and profit figures aside, there's another item a company discloses with quarterly regularity — the shareholding pattern.
It shows how shares of a company are split among the entities that make up its owners.
For instance, as per the latest March quarter shareholding announcement, the promoters of Asian Paints hold 50.53 per cent in the company, foreign institutional investors (FIIs) hold 15.38 per cent, domestic institutional investors (DIIs) hold 12.5 per cent, and the rest is held by various other entities.
So you know who holds how much in a company. But why, to begin with, is it important or even necessary to have these figures? To understand the significance of the shareholding structure, read on.
Shareholding categories
Let's start with understanding each category. There are two main sections — the promoter and promoter group and the public shareholding. Each section is further diced into smaller segments.
Promoters are the entities that floated the company, and to a large extent have seats on the Board of Directors or the management. Pantaloon Retail, for instance, has 19 per cent held by promoters.
Relatives of the promoters who hold shares also fall under this class and are termed the promoter group. Promoters are further split between domestic and foreign promoters. Hindustan Unilever, for example, has a 52 per cent foreign promoter holding.
In the public shareholding section, first comes institutional shareholding or the financial bodies that hold shares. Here, holdings are separated into mutual funds, financial institutions, insurance companies and foreign institutions. Shoppers' Stop, for example, has about 11 per cent held by mutual funds, a measly 0.4 per cent held by insurance companies and 5 per cent held by FIIs.
Institutional and promoter holdings make up the bulk of shareholding, and these are the categories to which you must pay the most attention. The final category is the general public, which includes investors such as you and me, and corporates, which hold shares as part of their investment portfolio. Details on shareholdings are available on the Web sites of the company and stock exchanges, along with historic shareholding structure.
Significance
Data now collected, what do you do with it? Holdings in various categories give you insight into control in the company, the favour the stock holds with the market players, and the entities that hold high stakes in the stock, changes in whose holdings will affect stock prices.
FII holdings in stocks are used as indicators in stock selections; stocks with high FII holdings are largely favoured. However, such stocks could take a hit should the FIIs decide to sell their stake. Retail investors may perceive such selling off to be a lack of faith in the stock by the FII.
However, such pullout of stocks on the part of an FII could be more a factor of circumstances in the FII's home country and liquidity, than a company's inability to scale up to expectations. Similarly, holding by mutual funds and insurance companies is an indicator on how favoured a stock is. Multiple funds holding the stock could be a sign of growth potential.
Note that any selling by any entity that holds a significant stake will usually be taken as a negative sign. For example, AT&T had picked up an 8.07 per cent stake in Tech Mahindra in late March 2010. It sold about 7 per cent that remained of its stake early last week, sending the stock sliding almost 6 per cent that day.
Next, promoter holdings show the extent of control promoters have over running of the business — a very high promoter holding is not a good sign.
A more diversified holding and a good presence of institutional investors indicates that promoters have little room to make and carry out random decisions that benefit them without gauging how it would affect earnings and other shareholders.
Therefore, high institutional holding may mean your investment is a tad safer since that company may then be more professionally run.
For instance, back in 2008, Satyam Computers decided to buy out Maytas Properties and majority holding in Maytas Infra, involving a total of $1.6 billion, citing it a diversification strategy. Institutional investors, including DIIs and FIIs, which held over 60 per cent of the company then, promptly cried foul, forcing the management to retract its decision.
Looking at figures for a single period is also unlikely to tell you much. Compare holding patterns with those of the previous quarters to check how holdings have changed.
Other details
Along with holding patterns, companies also disclose the entities — other than the promoters — that hold more than 1 per cent in the share capital. Companies are also required to declare the promoters' shares that have been pledged as debt collateral.
Such pledging of shares is a sign of risk as it indicates that a company is extremely strapped for cash and has no alternative route to fund raising, and is a reflection of sorts on the financial health of that company.
Share prices are liable to slide due to such pledging in certain cases. One, should the company falter in making payments, the lender may sell the shares.
Two, prices of pledged shares are usually tracked to check if they fall below a threshold — and if they do, promoters are required to make up the difference. Share prices could suffer as a combined effect of the margin call on promoters and selling by the lender if the promoter fails to cover the difference.
To illustrate, consider Orchid Chemicals. Back in early 2008, its promoter pledged about 7 million shares with brokerages Religare Enterprises and Indiabulls Financial Services to finance his own acquisition of shares in Orchid. On the back of financial woes, Bear Stearns sold its holdings in March 08, sending the stock plummeting 39 per cent in a single day.
The promoters were promptly required to pay up the difference, which they failed to do, triggering a further sell-off of the shares by the brokerages. Orchid was even subject to hostile takeover concerns after Solrex Pharmaceuticals, an arm of Ranbaxy Labs, bought those shares acquiring a 14 per cent stake.
Unlike the shareholding structure, which is declared every quarter, pledges of shares, their revocation or invocation have to be disclosed as they occur.
