Tuesday, November 8, 2011

How to Analyse Shareholding pattern

  • As a rule of thumb, higher promoter’s stake is perceived as positive and a lower equity stake could mean low confidence of promoters in their own company.  Rise in promoter stake is considered positive because promoters will commit additional fund only when they are optimistic about future growth of their company.
  • Similarly a higher FIIs stake is considered as positive and a lower FII participation could mean low confidence of FIIs in the company.  Rise in FII stake is considered positive as they will commit funds only when they are totally optimistic and confident about the future prospects of the company.

  • Too high or too low of promoters stake or FII holding is not favorable.
Share Holding can be done by any investor right from a person to a corporation to a FII. When an entity or a person buys a large chunk of share in another company, their intention may be to get control in:-
  • The decision making power of the company
  • Election of the Board of Directors of the company
  • Controlling the management of the company

Data regarding the share holding pattern is available in the stock exchange’s website, all financial websites as well as in the company’s website and annual reports. Share holding pattern of a company generally involves:-
  • Promoters’ Holding – Promoters may include domestic and foreign promoters. Promoters are the entities that floated the company, and to a large extent have seats on the Board of Directors or the management.
  • Persons acting in concert with the Promoters. Relatives of the promoters who hold shares  fall under this class and are termed as the promoter group.
  • Holding of the Non-Promoters – these include institutional investors like Banks, Financial Institutions, Insurance Companies, Mutual Funds , Foreign Institutional Investors  and others like private Corporate bodies,  Trusts, Foreign Companies , you and me ..
PROMOTERS AND FIIs – The two categories of shareholders to watch.
While analysing the shareholding pattern of the company, the two important categories to be watched are the promoter’s stake and the FIIs stake in that company. An increase in promoter stake does not always constitute a sign of confidence.  It is also necessary to see whether fresh funds have come in.  If fresh fund have been invested, where will they be invested.  Answers to these questions would help investors to determine whether jump in promoter stake is beneficial to the company. However, an increase in FIIs stake is a good sign – It shows that they are bullish on the stock. At the same time, the flip side of huge FII holding is that the stock price will be subject to huge price volatility when they off load the stake.


Analysing the holdings of various categories of investors would give you insights into the pattern of control in the company.
Here’s a collection of tips for you –

  • Rise or fall in promoters holding is to be studied by looking at two aspects. First what is purpose of promoters in raising or reducing their equity stakes and second, the methods promoters have adopted to increase or reduce their ownership.
  • If the promoters are increasing their stake to pay off debts and strengthen their balance sheet.  This is certainly positive for the shareholders.
  • Companies that have gone for share buy back also see rise in promoter’s stake.  The core objective of a buyback is to create wealth, but it also increases promoter’s equity stake at no additional cost. A rise in promoter’s stake due to merges or buyback means little for investors in real terms.
  • Promoters of companies that have opted for rights issue are forced to step in and bail out the unsubscribed portion just in case the rights are undersubscribed. Here, there will be an unintentional rise in promoter’s stake.  Shareholders declining to subscribe to rights issue and promoters chipping to rescue the issue do not qualify to be positive development.
  • A decline in promoter holding should also be analyzed in detail.  Decline in promoter holding can be due to various factors such as issuing fresh share towards employee stock option, or it could be due to offloading/issuing of fresh shares to strategic/financial partners. These changes should be carefully studied.
  • Promoters offloading their holdings in the open market are a warning signal.  Some dubious companies announce positive development periodically; promoters keep on offloading equity stake at the same time.  It is well laid-out trap for investors.
  • If you see promoters increasing their stakes in successive quarters, you know that the financial performance is going to be good and the stock prices would possibly be higher. However, it’s unusual to see promoters’ holding increase on a regular basis. They usually step in to buy after a sharp market decline to shore up their holdings.
  • A very high promoter holding is not a good sign. A 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.
  • Very low stake of promoters is perceived as diminishing confidence of promoters. This results in rampant sell off which results in loss for investors.
  • FII holdings in stocks are used as indicators in stock selections; stocks with high FII holdings are largely favored. 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.
  • Holding by mutual funds and insurance companies is an indicator on how favored a stock is. Multiple funds holding the stock could be a sign of growth potential. Therefore, such high institutional holding may mean your investment is a tad safer since that company may then be more professionally run.
  • While looking at the shareholding pattern, 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.
  • 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.

      Related Articles

No comments:

Post a Comment