Promoter Stakes And Returns

Have you ever heard of a businessman selling a flourishing business? It would seem to be a far-fetched case. The reason is that a businessman will never sell an enterprise that is earning him good returns; however, he would definitely sell a business that is either not performing well or expected to run into trouble. Let’s apply the same logic to companies. Should we expect promotors to sell their shares in the open market if the business is flourishing? Can we assume that promoters will decrease their holding in businesses which are not expected to do good in the near future and hold on to businesses that are generating huge profits for them? If we believe this logical reasoning to hold true, the promotors of companies that are doing good would like to have a controlling share in the business.

In this study, we focus on S&P BSE 500 stocks, promoter holdings in these companies, and the relationship between promoters’ stake and share price performance. It is widely believed that companies should be professionally managed and owners should have little say unless they are competent to manage the operations themselves. The SEBI mandates companies to have an independent director on board so as to ensure that conflict of interest is minimised and the Board of Directors is able to function independently. SEBI also mandates that for all private companies, minimum public shareholding should be 25 per cent.

This mandate was of great benefit to retail shareholders who could participate in the profits of companies that were closely held by promoters. Companies have to inform the exchange about their ownership structure, which should comprise parameters like promoters (Indian, foreign, person acting in concert), non-promoters (institutions which include FIIs, mutual funds, financial institutions, banks, insurance companies, etc.), and shares held by custodians. Non-institution includes corporate bodies and individuals. We focus on the relationship between promoter holding and returns and then extend it to how share prices have behaved when a company is led by Indian promoters versus foreign promoters.

Since companies report shareholding pattern every quarter, we have obtained the shareholding pattern as on September 2014. Using the promoter stake as a criterion, companies were segregated into nine buckets. After cleaning the data, we were left with 472 companies from the BSE 500 Index. Yearly return (CAGR) is calculated as change in share prices as on October 16, 2014 to October 16, 2015. To revalidate the conclusion, we back-tested the portfolio returns from 2011 till date.

During the four years studied here, S&P BSE 500 Index returns are mentioned in row indicated as R10. The best performing portfolio is the one where promoter stake is between 50-60 per cent and this strongly suggests that prices of companies appreciate more when promoter stake is high. The worst performing shares are either in the category where promoter stake is greater than 80 per cent or where non-promoter institutions have a majority stake. This leads us to further investigate if the returns of companies managed by foreign promoters differ from companies managed by Indian promoters.

Among the companies led by foreign promoters, highest return is generated by companies where promoter stake is the highest i.e. between 70-80 per cent.Indian companies where promoter stakes are high do not generate the highest return. Among the companies led by Indian promoters, maximum numbers of companies (86) are in the range where promoter stake is between 50-60 per cent and the returns are highest in this category across all the four years. This suggests that companies where Indian promoters have a majority stake do considerably well but not as good as companies where majority stake is with foreign promoters.

Looking at the historical share performance of the last four years, the conclusion for retail investor is that higher returns can be achieved by investing in companies which have higher foreign promoter stake of between 70-75 per cent. If we are focusing on companies with Indian promoters’ stake, the ideal promoter stake should be between 50-60 per cent. Retail investors should not forget that before investing always look for companies with strong fundamentals.