Understanding Shareholding Pattern: While most of the newbie investors already know the importance of checking the financials, debts, management, competitive advantage etc, however, the shareholding pattern is something that most of them ignore.
Nevertheless, there are a number of important learnings that you can find out by simply reading the company’s shareholding pattern.
In this post, we are going to discuss the things that you should know about the shareholding pattern of the stocks in the Indian stock market.
Every company discloses its shareholding quarterly. You can find the shareholding pattern of the listed companies on the stock exchange websites, company’s official website or the financial websites like money control.
The Shareholding pattern shows how the shares of the company are distributed among its different entities.
The two main distribution of the shareholding pattern of a company is- 1) Promoter and promoter’s group 2) Public shareholdings.
Promoters Shares: They are the owners of the company. They occupy most of the seats on the board of directors and management committee. The relatives of the owners who own the shares of that company come under promoter’s group.
Public Shareholding: They constitute of the Institutional shareholdings or financial bodies like mutual funds, financial institutes, insurance companies etc. FII (Foreign institutional investments) and FDI (Foreign direct investments) make a huge part of this distribution.
Lastly, general retail investors like you and me also come under the public shareholding pattern.
In addition, the individual entities who hold more than 1% of the public shareholdings are also disclosed by the company in its shareholding pattern.
Here’s an example of the Shareholding pattern of Prima Plastics:
Quick Tip: When you are reading the shareholding pattern of a company, always compare the pattern of that quarter with those of the previous quarters to check how holdings have changed.
Promoter’s share and Institutional shareholdings are the ones that one should notice carefully as they make most of the bulk of the shareholding pattern.
For example, FII holds a big chunk of the free float market cap of a company. If FII exited any stock in a hurry, because of any reason, the stock price may fall (selling of such huge amount of shares by FII might create a panic among the public).
On the other hand, when FII starts investing in a small company, that stock comes to the notice of the people and generally, its price starts to rise. Here, investments by FIIs are taken positively by the public.
Further, holdings of mutual funds or insurance companies show how much the stock is favored among the big players. Few stocks are the darlings of the fund managers and can be found in the portfolio of most of the mutual funds. This is favorable for the stock as the optimism of the high qualified fund managers creates positive vibes among the investors.
Shareholding Pattern: Thumb Rules
1. A high stake in the shares of the promoters is a positive sign. On the other hand, low stakes of the promoters show the less confidence of the promoters towards their own company.
2. A decently high FII stake is again taken as a positive sign. Moreover, an increase in the FII share is even a better sign as FII commits only when they are optimistic about the company and its future growth.
3. Although a high stake of promoters is favorable for the company. However, a very high shareholding pattern by the promoters is not good.
A moderately high diversified holding and a good presence of the institutional investors indicates that the promoters have a little room to make and carry out random decisions which may hurt the shareholder’s interests. Therefore, a diversified holding is a good sign for the investors.
4. In case of the shareholdings of the promoters changes (increases or decreases), the investors should pay attention to the purpose and method of the shareholding pattern change.
For example, the purpose to buy/sell the stakes can be to pay off debt, new acquisition, to strengthen the balance sheet etc Similarly, the method of increase/decrease the promoter’s shareholding can be by issuing new share, offloading etc.
4. If the shareholding of the promoter’s increases, it can be taken as a positive sign. Promoters are the insiders and they have the best knowledge about the company.
If the promoters are optimistic about the company and are increasing their holdings, this means that they are confident about the company’s growth as they know best about the companies future opportunities and strategies.
6. On the other, if the shareholding of the promoter is decreasing, it cannot be always taken as a negative sign. Maybe, the promoters are planning for a new venture, new acquisition, a new company or just to buy a new house. Everyone has the right to use their asset when they need it.
For example, in April’17, Jeff Bezos, the owner of Amazon company sold $1 Billion worth shares of Amazon. Should the shareholders panic and sell off their shares too.
No! Jeff Bezos was selling the shares to fund his Blue Origin rocket company, which aims to launch paying passengers on 11-minute space rides starting next year. Overall, the company fundamentals remained the same. Just because the promoter holdings decrease, doesn’t mean a danger sign.
7. However, if the promoters shares are continuously decreasing without any clear reason, then you might need to investigate further and take cautionary actions.
For example, during the Satyam scandal, Ramalinga Raju’s holdings were continuously decreasing. He sold over 4.4 crores shares in 2001 to 2008 period. Those who were following the shareholding pattern of the promoters might have seen these signs as dangerous for the investors.
Overall, shareholding pattern of a stock gives a lot of information about the company and should be considered as an important factor to check while choosing a stock to invest.
Bonus: Pledging of Shares
There’s one more concept that you need to understand along with the shareholding pattern of a company. It’s the pledging of the shares.
Shares are assets and hence it can be considered as a security in the form of collateral for taking loans. Many a time, the promoters keep their shares as a collateral for raising funds. Companies disclose the promoter’s share that has been disclosed as debt collateral in their quarterly reports.
A high pledging of shares by the promoters is risky for the investors.
Why is Pledging Risky?
Pledging of the shares is the last option for promoters to raise fund.
In the scenario, when the share price of these companies starts to fall, the collateral amount submitted by the promoters also decreases.
For example, let’s say that the promoters pledged their 1 lakhs shares each worth Rs 60 to get the fund. Overall, his total collateral amount is Rs 60 * 1 lakh shares = Rs 60 lakhs.
Now, if the share price of the stocks falls to Rs 40, then the collateral amount will decrease to Rs 40 * 1 lakh shares = Rs 40 lakhs.
If prices of these shares fall below a threshold, promoters have to increase their pledging of shares in order to make up the difference. In the above case, the promoters may have to pledge more shares as they are missing the threshold by (60-40) = 20 lakhs.
Further, if the company continues to fail to make debt payments, then the lender might also sell the shares to recover the collateral amount. This may lead to further fall in the share price.
Therefore, huge share pledging is really dangerous from the investors perspective.
Nevertheless, pledging of the share may not always result to be bad for the company. In cases where the company has a steady cash flow and making good profits, the promoters may be able to get off the pledge soon enough with a better financial situation for the company.
However, as an intelligent investor, it’s good to stay away from companies with promoters pledging of shares.
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That’s all. We hope this post on the shareholding patterns of the company is useful to the readers. Further, if you have any questions, feel free to comment below.
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