Stock Analysis: Understanding Shareholding Patterns

When a company issues shares to raise funds, different types of investors invest in such shares. It, therefore, becomes necessary to check which type of investors have invested in a company’s shares and how much stake do they have in the company. This is where the shareholding pattern comes into the picture.

Current shareholding split

For instance, the above pie shows distribution of ownership of Bharti Airtel among different categories of shareholders.

Promoter shareholding means the percentage of shares owned by the promoters of the company. The promoters are the founders of the company who own a majority stake in the company’s capital. A high stakeholding by the promoters is favourable. If the promoters hold a considerable portion of the stock of a company, it is a good sign. It shows that the promoters are taking the biggest risks in investing in the company and they believe in the company’s profitability.

FII refers to Foreign Institutional Investors. If the shareholding pattern reveals a high investment by foreign institutional investors, it is a positive sign as it shows that foreign investors trust the company to generate attractive returns. Sometimes, FII holdings patterns may be impacted by governance as per FDI policy across different industries.

MF refers to Mutual Funds who have invested in the company.

Others include all other domestic institutional investors apart from Mutual Funds (Eg. LIC of India and any other Qualified Institutional Buyer)

Anyone who buys shares of the company over the exchange. This includes retail investors.

Change in the shareholding pattern should be assessed

You should compare the shareholding pattern of multiple quarters to spot considerable changes. If the pattern is changing, find out why. If the promoters or foreign investors are divesting, it might indicate a loss of confidence in the company which is a red flag for you as an investor. A consistent decrease in the proportion of promoter shareholding or offloading by promoters is also a cause of concern. On the other hand, increased investment by promoters or other entities is a positive sign for you to invest in the company.

The above charts show that promoters holding remain constant in last few quarters, MF holdings increased (MFs are positive for the company) while FII holdings decreased (FIIs are negative for the company).

It is also meaningful to looks at the promoter’s pledged and locked holdings. Below chart gives promoter’s pledged and locked holdings of HDFC Bank.

In simple words, pledging of shares means taking loans against the shares that one holds. Shares are considered assets. Pledging of shares is a way for the promoters of a company to get loans to meet their business or personal requirements by keeping their shares as collateral to lenders.

During a bull market, pledging of shares may not create many issues as the market is moving upwards and the investors are optimistic. However, the problem arises in the bear market or economic slowdown. As the price of stocks keeps fluctuating, the value of the collateral (against the secured loan) also changes with the change in the share price. Now, if the price of the shares falls, the value of the collateral will also erode. In order to meet up the difference in the collateral value, the promoters have to cover the shortfall by either giving additional cash or pledging more shares to the lender.

Locked shares are the shares which promoters needs to hold as prescribed by SEBI.

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