A company has individuals or many people who have invested in the business. We call each of these investors’ shareholders of the company. Holding one share of a listed entity gives the legal right to call you a “Shareholder of a Billion Dollar Enterprise”. Sounds interesting.
Every listed entity on exchange as a regulatory obligation has to disclose their shareholding pattern to the general public. Shareholders are of a variety, but SEBI has classified them under specific categories.
These are the broad categories which you may find disclosed by companies: –
Foreign Portfolio Investors
Central Government / State Government(s)
There are many categories under public shareholders. To understand how actual numbers are reported, refer to these documents – Kotak Mahindra and Reliance Industries.
So, what is the use of shareholding pattern and why should you read these numbers?
The answer lies in the idea of Skin in the Game.
“Don’t tell me what you think, tell me what you have in your portfolio.”
Nassim Nicholas Taleb
Skin in the Game means how much-vested interest (skin) the owners have. Financial suffering or reward of owners is proportional to the shareholder. Owners who have a high holding in the company have a high personal interest in increasing the profitability and value of the business, as they have their own money in the business.
These are the various ways you can use shareholding pattern for improving your odds of finding the right company:-
Peter Lynch, former manager of the Magellan Fund and known for his book “One Up on Wall Street” always looked for companies which were ignored by mutual funds and institutions. He believed if he bought companies which had value and were ignored by Wall Street institutions, they would be trading cheaply. Then, when things turnaround, institutions will come and push stocks from lows to highs.
Investors should also look for diversification in holdings. Concentrated holding of a promoter or public is not a good sign. Promoters having high holdings will take decisions which may not be investor friendly. Public shareholders having a high stake is also not good, as such stocks will have high volatility and will not be suitable in bad times.
After understanding these aspects, one should also look for pledged shares by promoters. Pledging is when promoters take loans using their shares as collateral. Companies with pledged shares should be analyzed with extra caution. Shares can be pledged majorly for two reasons; either to fund a new acquisition or to fund current business operations. If done for the former, it is good, but for the latter it raises a red flag on capital efficiency.
Pledging can be dangerous when the market nosedives. In such times, the value of their shares pledged falls and the lenders ask promoters for more shares to maintain the collateral value. In the worst-case scenario, if promoters are unable to fulfill their request, then the lender sells shares in the open market, which is the last thing you want to see.
After reading this, we hope you will be analyzing the shareholding pattern of the company when you think of becoming a shareholder of that Billion Dollar Enterprise 😊.
To help you in this, Globe Trade Pro gives our users access to analyze shareholding pattern on their mobile screens of all listed companies on the stock exchange.