That ownership should be diversified from management is an age old and well attested management principle globally. If an investor had adopted this as a guideline in selecting a set of bluechip stocks for long-term investments, the returns would have been rewarding, shows an analysis of the 10-year returns (CAGR) of stocks of the benchmark Nifty50 Index.
A basket of 13 companies from the bellwether index with diversified ownership as on March 31, 2011, has returned about 13 per cent CAGR, significantly outperforming the index as a whole. This basket also beat the returns of a set of 34 promoter stocks in the same index over a 10- year period till March 31, 2021.
Three stocks — Cairn India, Sesa Goa and Ranbaxy — which were part of the Nifty50 index as of March 31, 2011 but were acquired by other companies later on, are excluded for this analysis.
Diversified ownership here implies either no promoter, or promoter/promoter family/ promoter trust owning less than the open offer trigger of 25 per cent. In case of a subsidiary/associate company of an MNC, these companies are counted among those with diversified holdings, if the parent company has diversified ownership. It is assumed these companies are free of individual/family control in making business decisions.
If an investor had made an equal weighted investment ten years ago in the Nifty50 stocks with diversified holdings and made no changes to those investments, he/she would have earned a neat CAGR return of close to 13 per cent by now. As compared to this, if one had made an equal weighted investment in all the Nifty50 stocks then, the CAGR returns would have been lower, at 9 per cent. This is just above the risk free and stress free 10-year bond, which was yielding around 8 per cent on April 1, 2011.
The outperformance of companies with diversified shareholding stays even when allocation as per free float market capitalisation based weights is considered. In all, only one of the 13 stocks (7 per cent) with diversified holdings gave negative returns in the 10-year -period, vs 13 of the 34 stocks (38 per cent) with high promoter holdings.
Promoter firms fall behind
An equal weighted investment in the basket of 34 promoter companies from the Nifty50 index on the other hand, would have given CAGR returns of a mere 7 per cent (8 per cent excluding PSUs). Thus, nine companies where the government is the promoter have been a drag on the overall returns. An investment only in these PSUs – BHEL, GAIL, NTPC, ONGC, Power Grid, SBI, SAIL, BPCL and PNB – would have given CAGR returns of just 1.5 per cent since 2011, even lower than what is considered a global safe haven – ten-year US treasury – was yielding then.
While there have been many success stories like HCL Technologies (24 per cent CAGR) and Kotak Mahindra bank (23 per cent), in the promoter category, there are also wealth destroyers like Reliance Communications (-34 per cent), Reliance Capital (-32 per cent), and stocks outside the ADAG group, like Jaiprakash Associates (-23 per cent).
What ails promoter cos?
What may be ailing promoter companies – whether government or private – is that decision making and power can be concentrated in the hands of the promoter. While this may be a boon if the promoter is highly skilled, in some instances, it can backfire as decision making can get impaired without adequate checks and balances. This is something that the market regulator SEBI is attempting to address somewhat when calling for separation of the posts of Chairman and Managing Director of listed companies. The rule which was to be implemented by April 2020, is deferred by two years. It mandates that the Chairperson of a company’s board should be a non-executive director and not related to MD/CEO.
Given these factors, investors would do well to consciously park a portion of their equity investments in a set of diversely held companies. Passive funds based on this strategy is also an idea worth exploring for fund houses.