Shareholding pattern ( Promoters / Non Promoters)

Hi All,

Just want to clarify a few things from the friends here.

The topic I want to discuss is share holiding pattern. Please correct me If I am writing anything wrong.

Promoters : Here promoters refers to board of directors, company invested in (Ex. Citigroup has a stake of 80% in Tech Pacific India Ltd earlier) etc, (please add more here).

Non Promoters : FII, Retail Investors, Mutual Funds, UTI, Banks, Financial Institutions, Institutional Investors etc etc.

Now my questions when do we say fundementals are good. Is it when Promoters have a high stake then non-promoters or vice-versa.

Please give ur views here.

Regards
Raj

Hi Raj

Some thoughts on this


When the promoters have a high stake that does not necessarily mean that the company is better. Their track record matters much more. In fact when the promoters have a very large holding they can easily manipulate and take their own interest with utter disregard to investors. A large Financial Institutional holding rather puts a check on the promoters. If you see the shareholding patterns of most blue chips the promoters hold about 25-30%. Look at the examples below

INFY Pr- 19% FI – 3% FII-38%
SATYAM Pr- 14% FI – 1.7% FII-52%
TATASTEEL Pr- 26% FI - 18% FII-22%
BAJAJ AUTO Pr-29% FI - 8% FII-19%

My study shows that companies with large promotor holdings are prone for price manipulations. Some examples

Kalapataru -77%
TITAN - 52%
Suzlon – 69%


Looks like nowadays we have to look at the FII holding to see the strength of the company. Interestingly the NSE site shows the promoter holding for ITC as zero !! ... But ofcourse 26% are held by a company called Indian Tobacco manufacturers Ltd

regards

Karthik

Thanks a lot Karthik for your detailed explanation.

I just want to give u an instance. Imagine a stock CMP is 20 and some group wants to offer 100rs for the stock and accumulated. They bought 50% of shares and considerably promoter's stake has increased to more than 50%. Then again it comes to normal price range 20 to 30 and promoters accumulated 20% more and price shoots up to 80. Its just an example for clarity

My question why would any group want to offer a price that is pretty higher than it market price.

If they do it then I m sure that promoters will never let go the price of share beyond their purchase price at any point of time since they have almost more than 70%. They can control demand and supply right.

In the interest of investors perspective, how it looks ?

I want more member to add to it their point of views please.

Regards
Raj

Raj

Sorry, Your example is not very clear.

As far as I know there are some norms from SEBI for accumulating the stocks of a particular company. An announcement has to be made if somebody accumulates more than a certain percentage of the total share capital from the market. This is to prevent easy takeovers.

Taking a stake from the promoters is usually done on an agreed price. And why would anybody offer such huge price difference compared to the CMP. And if somebody buys over the majority stake it is mostly based on valuations.

In case of companies with very large promoter holdings, they can easily manipulate the market price. In most cases they artificially jack up the price and then go for public offerings to mop up more money and create a demand.

Look at the penny stocks. In the boom periods the stock prices are artificially jacked up and the promoters make a killing. The morons running after TIPS are left with holding the useless stocks. After the Harshad Metha scam it was said that if you buy peanuts at the chowpatty beach there was good chance that it would be wrapped up in a stock certificate. Maybe a joke, but the value of those stocks was not more than that.

Why would the promoter try to hold down the price? More the market price more the value of his holding.

Hope there was some relief for your doubts

Karthik

Hi Rajesh

This is hypothetical example and may not be occuring.

High promoter stake does not translate into good management and good performance.

It certainly controls demand and sypply situation as you pointed out.

But before increasing the stake beyond 5% they have to make public offer. and also take regulatory approvals. They can not offer a price which is arbitrary but have to take into account average CMP.

If the company wants to purchase its own share that is not permitted. All such shares bought out by the company( as distinguished from the promoter) will be deleted from their books.Consequently per share value increases. Hence post such offer price might increase.


Now what promoter is going to do if it has high level of holding say 70 %.It will offer preferential share allotment at a hefty discount to its favourite group company. Shares will get diluted and ordinary shareholders' value will decrease. On the other hand it might sell its stake at a higher price by including items which are not part of share price. Open offer in the name sake will be lower.
Of course shareholders approvals will be obtained.

Let us assume they want to float IPO then for some time they will engage in buy and sell in such a way that price will get jacked up. The IPO will be floated at higher price. Later it will come down. Then they will go for preferential allotment. Thereafter the surplus money from IPO will be given to one of the companies in their fold in the name of loan, executing some contract or consultation.

They are the majority shareholder so approval will be there.

All this manipulations are part of numerous ways and means which can be exploited. High floating share does not mean that it will force the promoters to act rationally. But it does open the company to threst of hostile takeover. If promoters image is not good then they will be forced out sooner or later.

But all these may not happen if promoters are good and their image is good and they are perceived to be performing better.

Pankaj

what really interests me is not the promoter/non-promoter issue. but the PUBLIC HOLDING of a said company. how much holding do people like you and me holds in the company?

what has always intrigued me is how one can put use of this data while making his or her decision while buying or selling a stock.

a classic example of this can be found if one compares Tata Teleservice(TTML) and Bharti Tele.

in early 2005 the price of TTML was quoting at Rs. 30 odd levels while at that point Bharti was quoting at Rs. 200+ levels. both the stocks were at their all time high.

today's (25.05.2006) close of TTML is 21.40(NSE) and that of Bharti's is 393.80 (NSE)

WHY?

both the companies are in the same sector, a sector which is booming.
both the companies are doing equally good. then why TTML failed to keep pace with Bharti.

now lets look at the PUBLIC HOLDING of this 2 companies

Public Holding as on......31.03.03...........31.03.04..........31.03 .05..........31.03.06

TTML...........................5.52 ................7.85.................18.11........ .......23.60
Bharti.......................... 1.38.................1.03..................1.02... ..............1.01
(source:bseindia.com; all figures in %)

look over the years how TTML's PUBLIC HOLDING has increased, while that of Bharti's has decreased. its nothing, but plain accumulation and distribution. whenever a stock is in the hand of few it rises and when its get distributed prices stale.

please do give your opinions.

cheers,
jdm.

Thanks to everyone for the replies .

Pankaj & KArthik, I would like to take example of Godavari Fertilizers for this case.

When I researched about the companies shareholding pattern, the promoters had 75% and non-promoters has 25%. Not including the chart.

Now coming how the promoters aquired 75% of stake. When Godavari was trading in the range of 20 to 30 then Murugappa group have made a public offer and also took regulator approval for accumulating it. It made the scrip price to rise at the levels of 110 and they accumulated around 40% to 50% (Sorry not sure about the exact figures) and then they brought it down to 30 to 40 range to accumulate more and hence slowly the promoters now had 75% of the stake.

It has one of low equity and volume of trading is also very low. Now at this juncture how one would rate this company. Since the promoter can control the supply and demand.

I may be missing some information, everyone can tell their view and add to it.

Regards
Raj

Hi Raj

Rating of company is a different game than assesing it merely on the basis of promoter' holding.

If Harshad mehta holds 75 % in the company you would be better off without it. On the other hand if Ratan Tata has 75 % you would jump in. That is how he build TCS long before going to IPO.

Promoter's holding is one of the factors which go into rating a company.There are other factors each assigned weightage as per their importance.

1. The Sectors in which it is working
2. How good is financial parameters.
3. Growth prospects
4.Current earning growth, cash flow, equity debt ratio etc.
5.If Pays dividend
6. price history
7. EPS, PE and book value.
8. Risk factors
9. Policy directions of the Govt.
10. FII/FDI involvement
11.Labour relations
12. Brand image
13. Products performace

I can go on and on . But overall picture is taken keeing in view above points and then only rating can be given .

Promoters reputation will add weight to the ratings if it is good. Else all above will be nullified. Good examples will be GTB (now gone)(reputation of promoter was apperently good till the end of the company) ,Essar Steel and ISPAT among large companies. Small companies you will find hundreds of examples. Cash of vanishing companies and their directors floating new ones are not new in India. You need a strong and deterrent regulatory measure to curb this.


Pankaj

Hi Pankaj,

One more doubt, Can I see the promoter / Non-promoters stake at the end of everyday or it is declared in only quarterly results.

As u mentioned all the paramters, can u define the importance of each of the parameters. I would be very thankful to u.

Regards
Raj

Hi Raj

Promoters or non promoters' stake can be seen on the nse /bse web site. A link is provided for that purpose. Shareholding pattern is declared with quarterly returns. If a nybody wants to purchase shares above 5% limit they have to notify the Exchange(also if holding crosses 5% limit).It can be seen on Company Announcement.

Regarding factors we will slowly cover all the aspects in layman's term in balancing the portfolio thread.

Pankaj