Monday, November 2, 2015

Promoter Shareholdings in Indian Companies

That concentration of shareholdings in public listed companies is the norm is beyond doubt. At the same time, studies have been seeking to ascertain the level of shareholdings held by controlling shareholders (or promoters). Some such studies are set out below:

(a)        A study by Rajesh Chakrabarti shows average promoter shareholdings in Indian companies in 2002 to be at 48.1%;

(b)       Shaun Mathew’s 2007 study found that the average promoter stake in the top 100 companies listed on the Stock Exchange, Mumbai (also known as BSE) was 48.09%, while in the top 500 listed companies it was 49.55%.

(c)        A later longitudinal study by Balasubramanian and Anand of shareholding patterns in Indian companies during the period 2001 to 2011 evidences that the trend is in the direction of more concentration rather than dispersion. They find “empirical confirmation of the predominance of concentrated ownership and control in corporate India. Not only that but also the extent of such concentration over the years was increasing.” They find that the median holdings of promoters in the top 50 companies had risen from 42.94% in 2001 to 56.24% in 2011, and in the top 100 companies from 48.83% to 54.21%.

However, more recent studies indicate the loosening of concentration among promoters in that there has been dilution in their stake. Today’s Business Standard has a report based on promoters’ shareholding in private sector BSE 500 companies. The following extracts elaborate:

There has been a steady decline in promoters' holding in Indian private sector companies to an eight-year low of 43.4 per cent at the end of September 2015. The corresponding ratio was 44.4 per cent a year ago and 48.7 per cent at its peak in the March 2008 quarter.

A similar trend is visible in the public sector undertakings (PSUs) with a consistent decline in promoters' (government) holding as the government pursues divestment. Effective promoter holding in PSUs is down nearly 750 basis points or around 10 per cent in the past decade to 67.1 per cent at the end of the last quarter from an average holding of around 75 per cent in 2005.

The report also states that while there has been a reduction in domestic promoter shareholding, a reverse trend is evident among promoters that are multinationals as they have sought to bolster shareholdings in their Indian listed subsidiaries.

The above report proffers several economic and business reasons for this phenomenon. These include dilution on account of capital constraints and the need for external equity financing of Indian companies, which have been accomplished through offerings such as qualified institutional placements (QIPs), and also stake sales by Indian promoters.

In another study, I tested claims relating to shareholding concentration in a current context by analysing the shareholding pattern of Indian companies as of 31 March 2015, by gathering data on shareholding pattern of several companies listed on the National Stock Exchange of India Limited (NSE). Under regulations prescribed by SEBI, listed companies are required to periodically file their shareholding pattern with the exchanges indicating, among other things, the percentage of promoter shareholding. I examined the shareholding data for companies within three well-known indices:

(i)        the CNX Nifty, a well diversified 50 stock index accounting for 23 sectors of the economy and representing about 66.17% of the free float market capitalization of stocks listed on the NSE;

(ii)       the CNX 100, a diversified 100 stock index accounting for 38 sectors of the economy and representing about 78.57% of the free float market capitalization of stocks listed on the NSE; and

(iii)      the CNX 500, a broad based benchmark of the Indian capital market and representing about 95.77% of the free float market capitalization of stocks listed on the NSE.

Based on this study, the summary results are as follows:

Promoter Shareholding Data as of 31 March 2015

Parameters for Analysis

CNX Nifty
CNX 100
CNX 500
Average Promoter Shareholding

49.22%
52.17%
54.62%
Median Promoter Shareholding

49.77%
52.36%
54.88%

Unlike the Business Standard report, which takes into account private sector companies separately, my study represents a combined analysis of different types of controlling shareholders (i.e. business families, state and multinational companies). The shareholding concentration is less among the top 50 companies, but as the sample size increases the level of concentration increases as well. This suggests that controlling shareholders tend to hold more shares in the relatively smaller companies among the top 500 companies listed on the NSE.

Comparing the data with the previous studies discussed above, it is clear that the promoter holdings in 2015 are more concentrated than those in 2007, but they are less concentrated compared to 2011. This indicates that while there was a trend of further concentration during the period between 2001 and 2011, there has been some level of dispersion thereafter.

However, in addition to the economic and business reasons, I find a significant legal and regulatory reason that may have resulted in this outcome. In June 2010, the Government of India prescribed that within a three-year period thereafter (i.e. by June 2013) all Indian listed companies are to maintain a public shareholding of 25%, due to which promoters could hold no more than 75%.[1] For state-owned enterprises (SOEs), the minimum public ownership was set at 10%. However, the limit for SOEs has since been raised to 25% to be effective in 2017.[2] Promoters that held in excess of 75% (or 90%, as the case may be) were required to dilute their holdings. SEBI also devised a number of methods for such dilution, which non-compliant companies were required to adopt.

A logical follow through to this development would be that between 2011 and 2015 there is likely to be dispersion rather than concentration. More specifically, since the minimum public ownership requirements took effect from 2013, substantial dispersion is likely to have occurred thereafter. Given that the public shareholdings norms are likely to be more stringent for SOEs with effect from 2017, we can witness a further dilution of promoter shareholdings (especially in companies where the government is the controlling shareholder).

The above analysis is consistent with one of the findings in the Business Standard study which suggests: “Promoter stake was up during the 2011 and 2013 market correction, but resumed the downward trajectory in the bull run that started in the latter half of 2013”. The market changes seem to correspond with the legal and regulatory changes as well. While there is a correlation between these factors and the gradual dilution of promoter shareholdings in Indian companies, these studies would not clearly identify the causation aspects.

Although there are signs of change in shareholding patterns in Indian companies, they are not significant enough to bring about radical changes in either corporate governance or the market for takeovers.

[1] Securities Contracts (Regulation) (Amendment) Rules, 2010.
[2] Securities Contracts (Regulation) (Second Amendment) Rules, 2014.

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