Average promoter shareholding in BSE-500 firms slips to five-quarter low

They have diluted their shareholding to meet other funding requirements

The influence of Indian promoters on listed firms has been on a decline. The average promoter shareholding in the BSE-500 companies, excluding public sector undertakings (PSUs), has slipped to a five-quarter low of 47.3 per cent at the end of December 2018.
 
According to experts, promoters have diluted their shareholding, as they have used their stake to meet other funding requirements.
 
"Historically, public sector banks (PSBs) were the biggest source of debt funding in the country. In the last three years, lending from the PSBs, both for working capital and project finance, has become tough because of their asset-quality issues. Secondly, the turbulence in the debt markets has put pressure on the actual cost of debt in the economy. All these have left promoters with no choice but to raise money through selling equities,” said Siddhartha Rastogi, managing director, Ambit Asset Management.
 
Promoter pledging is another reason that has hurt promoter shareholding.
 
“A lot of these promoters have borrowed against shares to invest in new ventures, or for other purposes. Non-banking financial companies (NBFCs) were significant players in giving loans to promoters against pledged shares. The broad correction in markets has triggered margin calls on some of these pledged shares, which are being sold in the market,” said UR Bhat, managing director, Dalton Capital Advisors (India).
 

Illustrations by Ajay Mohanty

Analysts are closely monitoring the pledging risks in the companies. “The events that have unfolded in the last week have brought the promoter pledges under the limelight. As we have been highlighting each quarter, the cascading impact on the stock prices, triggered by unwinding of promoter pledge, often tends to be quite severe,” Edelweiss said in a recent note.
 
Promoters in the industrials and materials space can be most vulnerable to pledging risks. According to analyst estimates, promoter pledges in industrial and material space are highest at Rs 48,100 crore and Rs 38,700 crore, respectively.

However, the fall in promoter shareholding might be positive for overall markets.
Experts point out global indices such as MSCI Emerging Markets Index take into account only the non-promoter holdings while computing ‘the weight of a country, or an individual company.
 
So, lower promoter holding would mean higher weight in the global indices as more shares are available for public shareholders, they said. 
 
Further experts said the last few years saw the emergence of professionally-managed or private equity (PE)-backed companies, with typically no identifiable promoters. Companies such as AU Small Finance Bank, Varroc Engineering, Bandhan Bank and Indian Energy Exchange (IEX), which made their market debuts in the last two years, had strong PE backing.