The Hindu Business Line : Changes in promoter holdings: What's at stake for the shareholder?

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Changes in promoter holdings: What's at stake for the shareholder?

Radhika Kamath

A high promoter holding has not been a barrier in adding shareholder value. On the contrary, companies with a concentrated ownership have added more value than those with a dispersed ownership.

Recently, the Tata Steel Chairman was on record as saying that the Tata group would like to increase its stake in the company from 26.8 per cent to 33.6 per cent. There have been other instances of promoters arming themselves with shareholder approvals to allot themselves shares on a preferential basis or make open market acquisitions — in short, to employ various strategies to hike their stake in companies promoted and managed by them. Evidently, this is to fend off hostile takeover attempts.

This raises a number of questions. How pervasive is this phenomenon? If there is indeed a clear trend across sectors, has it accelerated in recent times? Are there differences in the acquisition behaviour, as between those with only a modest stake and those with holdings close enough to a majority?

Again, do promoters of large corporates feel more vulnerable than those of medium and small companies? Most important, does such a trend augur well for India Inc's performance? Have companies with concentrated ownership delivered significant value to shareholders? And is this practice likely to prove conducive to the market for corporate control, that is beginning to look up now?

To find the answers, Business Line constructed two sets of portfolios from a sample of BSE-500 companies and examined whether there were marked variations in the earnings growth of companies with high promoter stake and those with low promoter stake.

Declining Stake

Portfolio A consisted of companies with less than 20 per cent promoter holdings, and Portfolio B, of companies where promoters held more than 40 per cent. The changes were analysed over the last eight quarters for 440 companies, for which the data on promoters' shareholding are available.

Interestingly, the analysis showed that the average promoter holding actually declined from 50.6 per cent in September 2004 to 49.5 per cent in September 2005, to 48.5 per cent in September 2006. This is, however, much higher than the average of about 35 per cent in emerging markets, and about 25 per cent for developed markets. While this may prima facie be construed as a sign of improved transparency and better corporate governance, it cannot be established with certainty.

A look at the number of companies in which the promoter stake has fallen would be a better indicator. Of the 440 companies in the sample, in 29 the total promoter holding is below 20 per cent. And of the 306 companies in which promoters held more than 40 per cent, 80 reported a rise of about 10 percentage points over the last two years.

To understand the trend across companies of different sizes, Business Line classified the sample into three categories, based on their market capitalisation: Those with market cap less than or equal to Rs 1,500 crore, greater than Rs1,500 crore, less than or equal to Rs 4,000 crore and greater than Rs 4,000 crore. The analysis showed that the promoter holding in companies with market-cap between Rs 1,500 crore and Rs 4,000 crore is the highest, at 52.3 per cent, followed by companies with market-cap greater than Rs 4,000 crore, at 51.3 per cent, and those with market-cap of less than Rs 1,500 crore, at 45.3 per cent.

On M&A Radar

The inference is that it is the larger companies that are likely to be on the merger and acquisition (M&A) radar of foreign outfits seeking access to raw materials, low-cost assets, supply chain efficiencies or access to a growing market through such an approach.

Though buying out small- and mid-size companies may help in this effort, it is the inherent advantage the larger corporates have in terms of scale, low-cost structure and higher profitability that make them attractive takeover candidates.

This is particularly so in sectors such as steel, cement and pharmaceuticals, where domestic companies score far better on the said parameters vis-à-vis their global counterparts.

Holcim's acquisition of a 14.8 per cent stake in Gujarat Ambuja Cement in February, after picking up ACC in 2005, and Mylan's buy-out of 71.5 per cent equity in Matrix Laboratories in August are examples of inbound investments by foreign majors, carried out to gain access to a low-cost manufacturing base and a growing domestic market.

Low promoter holding, faster growth?

While low promoter stake lends greater liquidity to the stocks, does it really translate into higher earnings growth than companies with high promoter holding?

The analysis showed that the average earnings growth for the 464 companies for which data are available has been 44.5 per cent over the last eight quarters. Portfolio A saw an earnings growth of 62 per cent, on average, over the last eight quarters, while Portfolio B registered 31 per cent.

While this does indicate that companies with low-promoter stake have been able to deliver growth at twice the rate of those with high promoter holdings, there need not necessarily be a direct correlation between the two. It must, however, be noted that over 70 per cent of the companies in Portfolio A are small- and mid-size; hence, higher growth has come on account of their smaller base and not ownership pattern.

From Portfolio A, Balmer Lawrie, Infosys, L&T and Satyam Computers saw their earnings more than double during this period. Among those that saw triple-digit growth from Portfolio B were ABB, Aban Offshore, Areva T&D, BHEL, BEML, Dabur India, Financial Technologies, Havell's India, Kalpataru Power, Pantaloon Retail, Reliance Capital, Sical Logistics, Taj GVK hotels, Thermax and Unitech.

FII Changes

The FII (foreign institutional investors) holdings in the 449 companies rose 5.2 percentage points over the last seven quarters. From an average of six per cent in December 2004, the FII holdings went up to 11.3 per cent in September 2006. Construction, capital goods, financial services, healthcare and IT saw a sharp surge in FII holdings.

Stocks such as IVRCL Infrastructures, Nagarjuna Constructions, Astra Microwave, Prajay Engineering, Indiabulls Financial Services, Bajaj Auto Finance, Max India, Aztecsoft and Cranes Software saw a notable rise in FII holdings. But metals and chemicals sectors saw a dip during the same period.

Perhaps, it is the rising share of FIIs in the ownership that has put promoters on guard. The FIIs are generally known to be more amenable to giving up their stake in the event of mergers and takeovers. The shareholding of banks and domestic financial institutions, which are traditionally on the side of promoters, has been witnessing a marginal dip. This is also likely to have added to the vulnerability, resulting in promoters mounting defences.

Shareholder value

A high promoter holding has not been a barrier to adding shareholder value. On the contrary, companies with a concentrated ownership have added more value than those with a dispersed ownership. This could be seen from the stock price movements of the two sets of portfolios.

While Portfolio A appreciated by 120 per cent, Portfolio B went up by 136 per cent over the last two years. That the market was bullish in this period makes it difficult to distinguish the men from the boys. Based on these numbers, however, it is clear that the market did not take a negative view of companies with large promoter holdings.

The transition brought about by a large number of these companies from being family-owned and closely-held entities about a decade ago, to highly professional and dynamic now, has helped them ward off scepticism about their ability to manage and grow their businesses on a par with global standards.

Through a combination of measures spanning divestiture of non-core business to cost reduction to technology upgradation, family business houses have streamlined their operations. The recent instances of promoters hiking stakes in their companies may thus be justified on the back of their strong track record in delivering results and improving business outlook.

However, despite adopting defensive measures, the market for corporate control appears set to see heightened action over the coming years.

Going by instances such as Oracle picking up 41 per cent stake in i-flex solutions and EDS acquiring a majority stake in MphasiS BFL, one clear conclusion is that the timing of the deal is the key. If the market is compelling, the valuations may not seem an issue, although their role cannot be played down.

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