Shareholding patterns provide insights into the control of the company. High FII and public shareholding may mean good investor confidence. However, such holdings also mean high volatility in stock prices. On the other hand, high promoter holdings and changes in promoter shareholding may indicate where the control of the company lies and how much faith the promoters of company have in the company.
Post Satyam debacle, both SEBI and the Ministry of Corporate Affairs came out with rules in Feb’09 requiring greater disclosure by controlling shareholders (promoters) of their shareholdings and any pledging of shares to third parties. Still some investors feel that accountability of promoters remains a concern.
One study noted that all the independent directors viewed their role principally as that of strategic advisors to the promoters and most did not perceive their role as monitoring management and controlling shareholders (Khanna and Mathew, 2010). Another study noted that “if controlling shareholders cease to be pleased with the efforts of an independent director, such a director can be certain that his or her term will not be renewed” (Varottil, 2010).
These studies suggest that the interests of promoters may not be aligned with other stakeholders. Promoters may have certain other interests such as their remuneration as an executive and maintaining control, which can potentially compromise interest of minority shareholders. However, experts and veterans in the corporate governance field told SES that they do not agree with the same. According to them, whereas very high shareholding patterns may affect the interests of minority shareholders, very low promoter shareholding may render the company directionless. It is the promoters rather than the management that provide the motivation and direction to the company. A quick look at the facts throws some additional light. Of the 50 Nifty companies, 5 companies -ITC, HDFC, HDFC Ltd, ICICI, and L&T- which do not have any promoters are not only well run, but also most recognized brand in their sector. On the other hand, we have the case of Tata group, which is equally well run and recognized brand.
To summarize, the proponents for low promoter shareholding may harp on the fact that higher shareholding by promoters’ impacts control of the company and renders the management to the whims of the promoter. But they can also not repudiate the fact that some of the most well managed companies belong to such promoter groups. Therefore, shareholding patterns should not be viewed in isolation and other measures such as FII shareholding, and corporate governance practices should also be considered for the final verdict.
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