Sunday, April 13, 2014

A Study on Ownership Concentration in Indian Companies

The shareholding pattern of Indian companies has been the subject matter of academic studies, which have consistently shown that Indian companies are controlled substantially by controlling shareholders (or promoters) who hold a significant percentage of shares in public listed companies. The promoters range from business families to the state and to multinational corporations (MNCs). For a sampling (only) of previous studies, please see Rajesh Chakrabarti, Shaun Mathew and George Geis.

A more recent study examines the ownership concentration levels over the last decade. In their paper “Ownership Trends in Corporate India 2001-2011: Evidence and Implications” (available on the NSE Working Paper Series or on SSRN), Professor Bala N. Balasubramanian and Mr. R. V. Anand undertake a detailed empirical survey. The abstract of their paper is as follows:

The first decade of the new millennium saw dramatic changes in the ownership patterns in major listed corporations in India. Two developments were striking: promoters, especially in the domestic private sector, bolstered up their holdings to ensure continued entrenchment; and institutional investors significantly increased their holdings, especially in the private sector management-controlled companies segment. In both cases, these increases were achieved at the cost of retail non-institutional shareholders, whose holdings correspondingly recorded a steep fall. This paper documents this evidence, seeks to identify their underlying rationale, and assesses their implications for corporate equity investment and governance in the country.

The findings in this paper are important. On the one hand, SEBI’s efforts have been focused on creating a diversification of shareholding in the markets. Its regulations on mandating a minimum public float of 25% (10% for government-owned companies), which it has stringently enforced, is representative of this regulatory approach. More generally, the continued strengthening of the regulatory framework (both substantive law and its enforcement) has been with a view to enhance investor protection so as to enable more investors to participate in the stock markets. However, the empirical findings in the above paper point in the diametrically opposite direction. Ownership levels are becoming more concentrated than diffused, thereby defying the theory that better investor protection will result in greater dispersed shareholding by a larger number of investors. Moreover, retail investors do not seem to have gathered the requisite confidence in increasing their direct participation in the stock markets. While these findings are focused on ownership concentration trends in Indian companies, they may have a broader story to tell about the effectiveness of securities regulation, investor protection measures and corporate governance.

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