Understanding shareholding pattern of a company means knowing about the buyers of the company equities or stocks. Actually, it highlights the health, reliability, and stability of the given company. It is essential for investors to know whether the company is in stable hands or hot money.
Apart from promoters or original owners who established company, they may be retailers, mutual funds, banks, insurance companies, financial institutions, foreign institutional investors and foreign direct investors, and other financial institutions.
Transformation from privately owned company to public limited
If the owners of privately owned company decides to go in public to transform it into public limited, it needs to sell it’s stocks of shares or equities directly to the public by the means of Initial public offering or IPO.
The aim to transform as public limited may be to raise funds to expand business expansion, increase production or diversification of existing economic activities.
After listing to stock market, the company by following prescribed procedure of IPOs, can sell it’s shares or equities to anyone including individual retailer to foreign institutional investors.
Purpose of understanding shareholding pattern
Obviously, if you want to invest in stock market, especially in equities, understanding shareholding pattern is highly important to know the possibility of risk and rewards of investment.
If the promoters have more shareholding in the given company compare to public shareholding, it is rated more reliable and stable than in favour of foreign institutional investors or other hot money.
After all, investors invest money hoping to get better return on his original capital, rather than to pump to dump. And, it is believed that a reliable and stable company is necessary to generate better results in longer run.
Example of shareholding pattern
For an example, Tata Consultancy Services is listed on Indian stock market in 2004. Afterwards, it is public limited company. It is the second largest company in India in terms of market cap after Reliance industries.
As of now in 2023, its shareholders pattern is as :–
Promoters have 72. 30 percent shareholding. Next foreign institutional investors or FII have 12.94 percents, domestic institutional investors have 9.20, and others have 5.56 percents shareholdings. (Source — The economic times)
On the basis of above mentioned shareholding pattern, we can conclude that TCS is more reliable and stable company as far as growth and safety is concerned. Hence, it is regarded as bluechip company.
Understanding shareholding pattern and components
As per the SEBI (Securities and exchange board of India) rule, it is compulsory for every publically traded company to reveal or disclose shareholding pattern of investors in public who holds over one percent of shares.
In the process of understanding shareholding pattern, first of all, let’s begin with major components of shareholdings.
Understanding shareholding pattern structure
Usually, there are three types of shareholding pattern like promoters, public and non public.
- Promoters shareholding
- Public shareholding
- Non public and non promoters shareholding
A.Explaining Promoters shareholding
In terms of economic terms, promoters are the original founders or investors who established the company or business.
Generally, Promoters are authorised to take important decisions regarding the functioning of the given company due to majority of stake in the company. They participate in the board of directors meetings. Further, appoint company officials to conduct business, etc.
Publically, it is assumed that more equity stake in the hands of Promoters is a good sign. It is generalised that company is more reliable, stable and safe for long term investment.
Many times company decides to buyback shares to increase the stake of Promoters. It doesn’t mean the rise in valuation of the company but indicates the sound health of firm.
B. Public shareholding pattern structure
Unlike promoters shareholding, public shareholding pattern indicates the nature of investors. As we know that investors expect better income on investment whether they are domestic or foreign. So, profit remains ultimate goal by public shareholdings. Understandably, it is subject to change time to time and never be stable.
Components of public shareholding pattern
There are number of investors include in the public shareholdings from domestic as well as foregin sources. Here are some major components of public shareholding structure —
Domestic institutional investors
Mutual funds
Private and public Banks
Financial institutions
Insurance companies
Foreign Institutional Investors or FII
Foreign Direct Investors or FDI
Retail investors
Others
Tentatively speaking, it is a general assumption that higher percentage of mutual funds are treated good sign in terms of investing. Sometimes, foreign institutional investors in assumed good sign. But, it is not so important in terms of return in future but just assurance for credibility.
There is greater degree of variation is observed from company to company in terms of public shareholding pattern.
C. Non public and non promoters shareholding
I have already pointed out that as per SEBI (securities and exchange board of India), it is important for any company to disclose shareholding more than 1 percent.
Sometimes, it is also possible that company may issue shares privately. It may not to the public nor Promoters. In this category, it is called non public and non promoters shareholdings.
Last words on understanding shareholding pattern
For any investor, whether it is domestic or foreign, it is necessary to have knowledge about the total shareholding pattern of given company. It provides better insight for investors and encourage or discourage depending on the degree of transparency and shareholdings of company. Not least but most important to safeguard the interests of investors.
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