Understanding Shareholding Patterns of Indian Stocks

A shareholding pattern shows how a company’s shares are distributed among its different shareholders. It lists the names and ownership percentages of all shareholders. This information helps investors, analysts, and regulators understand who controls the company and how decisions are made.For investors, knowing the shareholding pattern helps in judging the stability and future growth of a company. For example, if promoters hold a large stake, it might indicate strong commitment to the company. Analysts use this data to evaluate company control and predict future performance.Though there are exceptions where companies like HDFC Bank and L&T have almost zero promoter holdings. In such cases, the shareholding pattern shows a different picture. While promoter holdings can indicate commitment in some cases, the presence of large institutional holdings can also reflect a company’s strong reputation and effective governance.Regulators, like SEBI, need this information to ensure market transparency and protect investors’ interests.SEBI requires all listed companies to disclose their shareholding patterns every quarter. This includes details about promoters, institutional investors, and the public. These disclosures must be accurate and timely to maintain market integrity.Understanding shareholding patterns is crucial for good corporate governance. It shows how power is distributed within a company. It helps to identify potential conflicts of interest. Check a few examples of conflict of interest here.Transparency in shareholding builds trust among investors and promotes fair practices. For instance, if XYZ Ltd. shows a significant increase in institutional holdings, it may reflect growing investor confidence.Topics:Point #1: Types of ShareholdersUnderstanding the types of shareholders in a company is essential for grasping how control and influence are distributed. Shareholders can range from promoters who founded the company to institutional investors like mutual funds and insurance companies.FIIs bring international capital into the market. Retail investors represent domestic individual participants. Additionally, other categories such as private corporate bodies, government entities, and employees also hold significant stakes.Each type of shareholder plays a unique role in shaping the company’s policies, governance, and market perception.1.1 PromotersPromoters are individuals or entities that start a company. They play a key role in forming and nurturing the business. Promoters often hold a large share of the company. This shows their strong interest and commitment to the company’s success. For example, in many family-owned businesses, promoters hold a significant portion of shares to maintain control and influence decisions.For instance, in the Tata Group, the Tata Sons holds a significant share. This helps them control the company and make important decisions. Another example is Reliance Industries. The Ambani family, who are the promoters, hold a large stake in the company. This stake gives them the power to drive the company’s growth and strategy.Promoters usually have a long-term vision for the company. They invest their time, money, and effort to build and expand the business. This makes them deeply involved in the company’s operations. Their large shareholding reflects their commitment to the company’s future.Promoters are the backbone of a company. Their significant shareholding shows their dedication and control over the business.1.2 Institutional Investors (DIIs)Institutional investors include mutual funds, insurance companies, and pension funds. These investors pool large sums of money to invest in various assets, including stocks. Institutional investors can significantly impact company policies and market perception.For example, mutual funds like HDFC Mutual Fund and SBI Mutual Fund invest large amounts of money in different companies. When they invest heavily in a company, it often boosts confidence among other investors. People see these mutual funds as stable and professional investors. This can make other investors feel more secure about investing in the same company.Insurance companies like LIC also invest in stocks. Their investments can have a big impact on the companies they invest in. For instance, LIC has large investments in many top Indian companies. This not only helps the companies grow but also gives LIC a say in important company decisions.Pension funds are another type of institutional investor. These funds manage retirement savings for many people. They invest in stocks to grow these savings. For example, the Employees’ Provident Fund Organisation (EPFO) in India invests in various companies. Their investments are seen as long-term and stable, which can positively influence the stock prices of these companies.1.3 Foreign Institutional Investors (FIIs)Foreign Institutional Investors (FIIs) are investors from outside the country who invest in the Indian stock market. FIIs are crucial for the Indian market as they bring in foreign capital. FIIs helps to improve the liquidity of the stock market, meaning it is easier to buy and sell shares.Over the years, FII investments in India have grown significantly, reflecting global confidence in the Indian economy. For example, FIIs have been consistently investing in companies like TCS, indicating strong trust in its future growth. FII’s hold about 13% stake in TCS.Another example is HDFC Bank, one of India’s largest private banks. FIIs hold a significant stake (47%) in HDFC Bank. The confidence of FIIs in HDFC Bank also encourages other investors to buy its shares, which can increase the stock price.FIIs often invest in sectors that they believe will benefit from India’s economic growth, such as technology, banking, and infrastructure. Their investments are a sign that they see India as a good place to invest their money for the long term.1.4 Retail Investors (Public & Others)Retail investors are individual investors who buy and sell securities for their personal accounts. They typically invest smaller amounts compared to institutional investors. Retail investors have a growing presence in the Indian stock market, especially after the COVID-19 pandemic in 2020.During the pandemic, many people started working from home and had more time to explore new ways to grow their savings. With interest rates on savings accounts being very low, many individuals turned to the stock market. Online trading platforms like Zerodha and Upstox made it easy for people to start investing with just a smartphone and an internet connection. These platforms provided easy access to market information and trading tools, which encouraged more people to invest.For example, the number of new Demat accounts opened in India increased significantly during the pandemic. This surge in retail investors contributed to higher trading volumes and more activity in the stock market.Retail investors can influence market trends, but their decisions are often based on market sentiment rather than detailed analysis. For instance, when news about a company’s new product launch spreads, many retail investors might buy shares quickly. This can cause a short-term spike in the stock price. However, this decision might not be based on a thorough understanding of the company’s long-term prospects.Despite their smaller investments, the collective actions of retail investors can have a big impact on the market. Their growing participation has made the Indian stock market more vibrant and diverse.For example, during the GameStop trading frenzy in the US, we saw how retail investors can significantly influence stock prices. This is a trend observed globally, including in India.1.5 Other CategoriesOther shareholder categories include private corporate bodies, government, and employees. Each of these groups plays a unique role in the stock market and in the companies they invest in.Private Corporate BodiesPrivate corporate bodies are companies that invest in other companies. These investments can be strategic, helping both companies grow and succeed. For example, Tata Sons, the holding company of the Tata Group, owns significant shares in various Tata companies like Tata Motors and Tata Steel. By investing in these companies, Tata Sons helps them with funding and strategic direction, ensuring they grow and perform well.Government HoldingsGovernment holdings often involve public sector undertakings (PSUs) where the government owns a significant share. These investments are usually in key industries like energy, infrastructure, and finance. For example, the Government of India holds a large stake in Oil and Natural Gas Corporation (ONGC) and State Bank of India (SBI). These holdings help the government ensure that these critical companies operate in line with national interests, providing essential services and stability to the economy.Employee ShareholdingEmployee shareholding includes shares given to employees as part of their compensation. This can align employees’ interests with the company’s success, making them more motivated to work hard. For example, companies like TCS offer stock options to their employees. When employees own shares in the company, they directly benefit from its success. If the company does well, the value of their shares increases, which can be a significant financial reward. This also makes employees feel more connected to the company’s goals and performance.Point #2 SEBI Guidelines on DisclosureThe SEBI sets rules for how companies must disclose their shareholding patterns. These rules are important for ensuring transparency in the stock market. SEBI requires all listed companies to disclose their shareholding patterns every quarter. This means they must report who owns shares in their company four times a year.Specific Requirements for DisclosureSEBI has outlined a specific format for these disclosures. Companies must categorize shareholders into distinct groups:Promoters: This group includes the individuals or entities that founded the company and typically hold a significant stake to retain control.Institutional Investors: These are professional investors like mutual funds, insurance companies, and pension funds that invest large sums of money.Foreign Investors: This category includes Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs), who bring in foreign capital.Retail Investors: Individual investors who buy and sell securities for their personal accounts fall into this group.This categorization helps everyone, from regulators to small investors, understand who owns the company and how much control different groups have.Example of Disclosure FormatFor example, consider a company like HDFC Bank. Its quarterly shareholding pattern disclosure might look like this:Promoters: 0%Institutional Investors (DII): 33.59%Foreign Investors: 47.83%Retail Investors (Public): 18.56%This breakdown shows that institutional and foreign investors hold a significant portion of the company’s shares. It is also an indication of broad-based trust and investment from both domestic and international markets.Importance of TransparencyTransparent shareholding patterns are crucial for maintaining investor confidence. When investors see a clear picture of who owns a company, they can make more informed decisions. For instance, if a company has a high percentage of promoter holdings, investors might view this as a sign of strong commitment by the founders. Conversely, a high percentage of institutional holdings might be seen as a vote of confidence from professional investors.Point #3 Upper and Lower Limit on Shareholdings of Indian Listed CompaniesSEBI has specified an upper limit (indirectly) for promoter holding in Indian listed companies to ensure market fairness and transparency.Lower LimitSEBI mandates that at least 25% of a listed company’s shares must be held by the public within three year of listing. This is known as the minimum public shareholding (MPS) requirement. The aim is to ensure that a significant portion of shares is available for trading in the market. This is done to enhancing liquidity and market depth.Companies failing to meet this requirement are subject to penalties and must take steps to increase public shareholding.Upper LimitThere is no specific upper limit on promoter shareholding imposed by SEBI. However, SEBI has regulations to address situations where promoter holdings are too high, potentially limiting market liquidity and public participation. SEBI’s focus is more on ensuring sufficient public float rather than capping promoter holdings.SEBI is strict when it comes to MPS. If a company meets the MPS requirement (of 25% holding) automatically the promoter holding is capped at a maximum of 75%.Example #1 Reliance IndustriesReliance Industries have the following shareholding pattern:Promoters: 50.31%FII: 22.06%DII: 17.2%Public: 10.43%Allow me to explain how the “minimum public shareholding (MPS)” rules is followed in this case.Based on the above shareholding pattern, Reliance Industries appears to be compliant with the minimum public shareholding (MPS) requirements in India.Here’s why:The MPS rule mandates a minimum of 25% public shareholding.In this case, public holding (FII + DII + Public) is 22.06% (FII) + 17.2% (DII) + 10.43% (Public) = 49.69%Since the total public holding (49.69%) is well above the 25% minimum threshold, Reliance Industries satisfies the MPS requirement.In the context of Minimum Public Shareholding (MPS) requirements in India, holdings by Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) are considered as part of the public shareholding.Here’s why:While FIIs and DIIs are institutions, they represent a diverse pool of investors, including individuals and other institutions. These investors can be mutual funds, pension funds, insurance companies, etc.By including FII and DII holdings in the public shareholding calculation, the MPS rule ensures a broader ownership structure beyond just the promoters. This aligns with the core objective of the regulation.It’s important to note that some exceptions exist:Government shareholding: Shares held by the Indian government are not considered part of the public shareholding for MPS calculation purposes.Example #2 Adani Stocks and Promoter HoldingsAdani highlights the importance of regulatory compliance, market transparency, and the potential impact of concentrated ownership on investor confidence.The controversy regarding compliance with the minimum public shareholding (MPS) rules involved several Adani Group companies. Allegations were made that these companies did not meet the SEBI requirement of maintaining at least 25% public shareholding. The Adani Group companies implicated in these allegations included:Adani Enterprises (72.6%)Adani Energy (73.22%)Adani Total Gas (74.8%)Adani Power (71.5%)These allegations arose from concerns about the significant shareholdings by offshore entities that were reportedly linked to the promoters. It raised questions about whether these shares could be considered part of the public float.The issue drew regulatory attention and market scrutiny, highlighting the importance of transparency and adherence to SEBI’s MPS rules.Get more on shareholding pattern of top Indian stock in the Stock Engine:Point #4 A Query Related To Shareholding PatternI started writing this article to address a query raised by a reader. This was the question asked:Query: “Suppose there is a listed company which had about 65% promoter holdings. Gradually, the promoter holding were liquidated to zero (say over a 5 year period). The new shareholding pattern looks like this: Multiple FIIs, Multiple DIIs and Retail Investors (like that of HDFC Bank). I know that these companies are Board-Driven companies. But how these boards are constituted? I want to know the details of how these type of companies are run in absence of any one majority shareholder.“In companies where there is no single majority shareholder the board of directors plays a crucial role in the company’s governance. Here’s a simple explanation of how these boards are constituted and how such companies are run:Directors are typically nominated and elected by the shareholders during the Annual General Meeting (AGM). Institutional investors, who hold significant shares, often have a strong influence in nominating and voting for board members.A significant portion of the board consists of independent directors who are not affiliated with the company or its major shareholders. Regulations often mandate a certain number of independent directors to ensure unbiased decision-making.The board appoints a CEO and other key executives who manage the day-to-day operations of the company. The board regularly reviews the performance of the management team and holds them accountable for achieving strategic goals and financial performance.Regular board meetings are held to discuss and decide on key issues such as strategic direction, financial performance, mergers and acquisitions, and other major initiatives.Decisions are often made by a majority vote of the board members present. In the absence of a dominant shareholder, consensus-building and the influence of institutional investors play a significant role.FIIs and DIIs, due to their significant shareholding, actively engage with the board and management on various issues, including corporate strategy, governance practices, and performance.In companies with no single majority shareholder, the board of directors plays a pivotal role in governance and decision-making. The board is constituted through shareholder elections, with significant input from institutional investors.Point #5 Comparison Between Promoter and Board Driven CompaniesAspectPromoter Driven CompanyBoard Driven CompanyOwnership StructureMajority shares held by promoters/foundersWidely held by institutional and retail investorsDecision-MakingCentralized, with significant influence from promotersDecentralized, driven by the board with diverse inputsBoard CompositionOften includes family members and close associatesComprises independent directors, professionals, and institutional nomineesGovernancePotentially prone to promoter influenceFollows rigorous corporate governance standardsAccountabilityPromoters hold significant accountabilityBoard and management held accountable by institutional investorsFlexibilityHigh flexibility and quick decision-makingDecisions may take longer due to need for consensus and board approvalTransparencyCan be less transparent, with information asymmetryHigh transparency due to diverse investor scrutinyStabilityStability due to long-term vision of promotersStability driven by professional management and regulatory complianceConflict of InterestHigher risk of conflicts of interestLower risk due to checks and balances from independent board membersStrategic DirectionCan be influenced by promoters’ personal interestsStrategic direction shaped by board consensus and investor interestsInvestor ConfidenceCan vary, often higher among loyal investorsGenerally high due to professional management and robust governanceSuccession PlanningOften family succession, may lack merit-based planningProfessional succession planning based on merit and expertisePoint #6 Advantages and Disadvantages of Promoter and Board Driven CompaniesTypeAdvantagesDisadvantagesPromoter DrivenQuick decision-making and implementationRisk of promoter overreach and conflict of interestStrong long-term vision aligned with promoter interestsPotential for less transparency and weaker governanceStability and consistency in leadershipSuccession planning may be nepotistic, lacking meritocracyDeep understanding and commitment to the businessLimited input from diverse perspectivesBoard DrivenHigh transparency and rigorous corporate governanceDecision-making can be slower due to the need for consensusProfessional and merit-based managementPotential instability if there is frequent turnover in board or management positionsDiverse perspectives leading to balanced and strategic decision-makingMore complex governance structure may lead to bureaucracyLower risk of conflicts of interest due to checks and balancesInstitutional investors may prioritize short-term returns over long-term growthGreater investor confidence due to professional management and accountability mechanismsLack of a single, visionary leader can sometimes result in a less unified strategic directionPoint #7 Conflict of InterestExample #1: Tata SonsTata Sons is the holding company of the Tata Group. The Tata Trusts own around 66% of Tata Sons. Ratan Tata has a significant influence over the Trusts.Shapoorji Pallonji Group, is also a significant shareholder in Tata Sons (about 18%). Cyrus Mistry from this group was appointed as Chairman of Tata Sons in 2012.In October 2016, Cyrus Mistry was removed from his position as Chairman by the board of Tata Sons. This happened though Cyrus Mistry was the Chairman of the Group and a representative of a dominant shareholder group (Shapoorji Pallonji Group).This kind of removal was possible as it was aligned with the Tata Trust.This is a typical example of conflict of Interest between two major board members. Though Tata Trusts does not own stakes in Tata Sons or Tata Group Companies, it can still have a dominant say when the need arise.Note: In 2020, India’s Supreme Court upheld the decision of Tata Sons to remove Cyrus Mistry as Chairman, but the case highlighted the potential for conflicts of interest inherent in concentrated shareholding patterns (read more).Example #2: Reliance IndustriesReliance Industries Limited (RIL) is one of India’s largest conglomerates, founded by Dhirubhai Ambani. After Dhirubhai Ambani’s death in 2002, the ownership and control of the company were left to his two sons, Mukesh Ambani and Anil Ambani.The feud between Mukesh and Anil Ambani over control of the company led to significant conflicts of interest. The promoter group, consisting of the Ambani family, held a substantial share in RIL. This allowed them to exert considerable influence over the company’s decisions.Disagreements arose (between the two brothers) over the strategic direction and management of the company, affecting its governance and operations.In 2005, the feud was resolved by splitting the company. Mukesh Ambani retained control of the core business of Reliance Industries. Anil Ambani took over the telecom, power, entertainment, and financial services arms.The division was meant to mitigate the conflict of interest and allow both brothers to independently manage their respective companies.Have a happy investing.Suggested Reading: