Thumb rules.

A higher holding by the promoter is considered positive while a lower equity holding indicates the low confidence in their own business. An increase in promoter holdings is a positive sign because promoters pump in additional money only if they are confident about the growth of their company in the future.

Also, a higher FIIs holding is a positive sign while a lower FII investment shows that their confidence level in the company is less. An increase in FII holding is a positive sign because, only if they are pretty sure about the company’s future prospects, will they commit investments in the company.

Very high or very low stockholding by promoters and FII cannot be considered favorable.

WHO HOLD the SHARES?

When an individual or a corporate entity or an FII acquires a large percentage of shares in a particular company, then their intention could be to take over its control which includes decision making, getting elected to the board of directors, and taking control of the management.

Distribution pattern

Data concerning the distribution of shareholding is accessible from the website of stock exchanges. Further, other financial websites and the company’s own website and their annual reports provide the data.

The Shareholding pattern of a company includes:-

• Holdings of the promoters may be both foreign and domestic. Those who started the company are called promoters, and they hold most of the seats on the Director Board.

• Relatives of promoters holding shares also come under the classification of promoters and called promoter groups.

• Institutional investors such as Banks, Insurance Companies, Mutual Funds, Financial Institutions, Foreign Institutional Investors (FII), and private entities such as Trusts, Domestic and Foreign corporates, and of course the individual investors. All these are not part of the original promoters.

Two shareholder categories.

While we study the company’s shareholding pattern, the percentage of holdings by the promoters and FIIs are two categories considered to be important.

An increase of promoter holdings does not necessarily mean to be an indication of their confidence level. We must also look for a fresh inflow of funds and how they have been deployed. This will be of help to investors in determining whether an increase in promoter holding has actually done any good for the company. Although an increase in FIIs holdings is a good indication, FII holding can create huge volatility in the price of stock whenever they liquidate the stock.

How do we analyze

By analyzing the stock holdings of different categories of investors will provide an idea about who controls the company.

Some useful tips

• An increase or decrease in the holding of promoters can be understood by looking at two things. One is the purpose for which the promoter is increasing or reducing their equity holdings, and the other is the method used by the promoter for increasing or reducing their holdings.

• In case promoters are increasing their holdings to reduce debts and improve their balance sheet, then it is definitely a positive indication to the shareholders.

• Companies that have opted for a share buyback also saw an increase in promoter’s holdings. Although the main object of a buyback is creating wealth, it also increases the holdings of the promoter without any additional cost. An increase in promoter’s holding because of mergers or buyback is of no real benefit to the investors.

• When a rights issue is undersubscribed due to lack of interest by the shareholders and the promoters are forced to absorb the unsubscribed shares, an increase in promoter holdings is not a positive sign.

• A reduction in promoter holding also calls for a detailed analysis. This could be due to many reasons like an issue of new shares to employees as part of the stock option plan, or it may be for offloading or issuing new shares to financial or strategic partners.

• The selling of promoters holdings in the open market is to be taken as a warning signal. We often come across dubious companies periodically announcing positive development and simultaneously selling their holdings which can turn out to be a trap.

• Although it is unusual, if we find that the promoters are increasing their holdings continuously, it is a sign that its financial performance will be good and the price of stocks is likely to increase. We usually find them doing this after the market has declined sharply as a way to increase their holdings.

• A Promoter holding a very high percentage of stock in the company is not a good indication. Only a diversified holding pattern and a sizable institutional investor's presence shows that promoters have limited freedom to implement decisions for personal gains, randomly and without gauging its effect on earnings and impact on other shareholders.

• If the holdings of the promoters are very low, it is seen as their low level of confidence and could trigger a selling spree that could result in a loss to investors.

• Holdings by FII can be used as an indicator for selecting stocks. Those stocks which have high FII holdings attract investors. But these stocks are prone to take a beating when FIIs decide to liquidate their stocks. Such sell-off is seen by retail investors as their loss of faith in the stocks.

• Holding of the stocks by mutual funds companies and insurance companies are indicators of how attractive are the stock. Stock holdings by several funds can be considered as a sign of potential growth potential. So a high percentage of holdings by institutional investors could mean that the investment is relatively safer.

• When we look at the pattern of shareholding, it is necessary to compare it with earlier quarters to check how they have changed over the period.

• Apart from stockholding patterns, companies disclose the names of those entities holding more than one percent of share capital. Companies are mandated to declare the quantum of shares that have been pledged by the promoters.