Young Investor

Understanding shareholding pattern

BL RESEARCH BUREAU | Updated on October 08, 2011

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There's one item which companies disclose with quarterly regularity and is worth more than a passing glance. It's not sales or raw material costs or profits that , but shareholding patterns. And here's why you should look at it.

Shareholding categories

Shareholding pattern of a company shows how its shares are split among the entities that make up its owners. There are two main sections: the promoter and promoter group and the public shareholding.

Promoters are the entities that floated the company, and to a large extent have seats on the Board of Directors or the management. Relatives of the promoters who hold shares also fall under this class and are termed the promoter group. Promoters are further split between domestic and foreign promoters. In the public shareholding section, first comes institutional shareholding or financial bodies that hold shares. Here, holdings are separated into mutual funds, financial institutions, insurance companies and foreign institutions. Institutional and promoter holdings make up the bulk of shareholding, and these are the categories to which you must pay the most attention. Last comes the general public: investors such as you and me, and corporates, which hold shares as part of their investment portfolio. Details on shareholdings are available on the Web sites of the company and stock exchanges.

Significance

Holdings in various categories provide insight into control in the company, favour the stock holds with the market players, and entities that hold high stakes in the stock, changes in whose holdings will affect stock prices. FIIs, for instance, hold a sizeable chunk of the free float marketcap. Stocks in which they have high stakes could suddenly nosedive if FIIs exited in a hurry, no matter the reason. Stocks with lower stakes could then prove less volatile. Holding by mutual funds and insurance companies is another indicator on how favoured a stock is.

Next, promoter holdings show the extent of control promoters have over running of the busines. A more 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. Always compare holding patterns with those of the previous quarters to check how holdings have changed.

Companies also disclose the individual entities (other than the promoters) that hold more than a 1 per cent stake. Companies further disclose the promoters' shares that have been pledged as debt collateral. Should there be a failure in making payments, the lender may sell the shares, prompting a fall in stock price. If prices of pledged shares fall below a threshold, promoters are required to make up for the difference. Share prices could suffer as a combined effect of the margin call on promoters and selling by the lender if the promoter fails to cover the difference. Pledges of shares, their revocation or invocation have to be announced as they occur.



Published on October 08, 2011

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