What is Shareholding Pattern, Definition, Meaning & Analysis

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Synopsis:

A company’s shareholding pattern shows to what extent it is owned by various types of investors, including its promoters, domestic institutional investors, foreign institutional investors, and retail investors.

Changes in shareholding patterns can reveal interesting insights about the future of a company. Therefore, investors need to examine the changes in the shareholding pattern of companies regularly.

What is Shareholding Pattern, Definition, Meaning & Analysis

If you are into trading, you must have heard the term “shareholding pattern.” This is one of the most important criteria for traders and investors to research a stock. In simple words, shareholding pattern means who owns a company and to what extent.

A company can have several kinds of investors. To begin with, the promoters, who start a company. Then, institutional investors, which in India include big corporations, such as insurance companies, like LIC, mutual funds, etc. A firm can also have foreign institutional investors (FIIs). It can even have retail or individual investors. 

In a nutshell, shareholding pattern means how a company’s ownership is spread across various categories of investors. Now that we have learned what shareholding pattern is and its definition, let us take a deeper dive into this topic.

Introduction to Shareholding Pattern

A company’s shareholding pattern can tell you the extent to which it is owned by its promoters and by the public. If a company has significant promoter ownership, it could mean that its promoters have chosen not to sell its shares to other investors in a significant manner.

It can also mean that its promoters have offered the shares to other investors, but those investors have not shown interest in investing in the company. As an investor, you can draw interesting insights by examining changes in a company’s shareholding pattern.

Broadly speaking, a company can have two kinds of investors: promoters and the public. Promoters include the founders of a company and their relatives, who typically hold important positions in a company’s management committee.

Then, we have the public, which includes all kinds of non-promoter shareholders of a company, including domestic institutional investors, FIIs, and retail investors. In India, listed companies are required to publish the data on their shareholding pattern every quarter. Investors should analyse this data every quarter.

Types of Shareholders

Companies tend to have two types of shareholders mostly: common and preferred. Of these two categories, common shareholders are far more common than preferred shareholders. Let us understand these terms better:

  • Common shareholders: These shareholders have voting rights in a company. They also get dividends from the company they have invested in. That said, a company is not under any obligation to pay dividends to common shareholders. When people buy shares in the stock market, in most cases, they buy common shares.

  • Preferred shareholders: Such shareholders do not have voting rights in a company. However, when it comes to paying dividends, they are preferred over common shareholders, which means a company has to first pay dividends to its preferred shareholders, and then only it can pay dividends to its common shareholders.

Then, we have a third category of shareholders known as convertible preferred stockholders. At times, companies issue convertible preference shares, which can be converted into a certain number of common shares on a predetermined date if the owners of such shares wish so. These types of shares are not as common as other kinds of shares.

Components of Shareholding Pattern

A company has predominantly two kinds of shareholders: promoters and the public. Within the public, there are many kinds of shareholders:

  • Promoters: These are founders of a company. In this category, we have a company’s founders and their relatives who own a stake in the company.

  • Public: This includes the general public (retail investors), domestic institutional investors, and FIIs.

    • a) Retail investors: In percentage terms often retail investors do not hold significant ownership in companies. However, they are extremely important, as the regulators have several provisions to safeguard their interests.
    • b) Domestic institutional investors: This includes institutional investors, which have their head offices and most of their operations in India. Within this category, we have insurance companies, mutual funds, banks, etc.
    • c) FIIs: FIIs are institutions based in foreign countries, which have invested in Indian equities.

How to Analyse Shareholding Patterns for Trading

For an investor, it is a must to analyse the shareholding pattern of companies he is interested in. But how to go about it? Here are the tips you must follow:

  • Analyse the shareholding pattern over quarters: All listed companies in India publish data about their shareholding pattern every quarter. As an investor, you should check how their shareholding pattern is changing quarter over quarter. Which category of shareholders are increasing or reducing their stake in a company and why? Apart from that, you must also follow day-to-day news about the shareholding pattern of a company.

  • Check for high promoter ownership: Typically, high promoter ownership is a sign of promoters’ faith in their business. If promoters do not hold a significant share in their company, it can show that they do not have confidence in their own business idea. If this is the case, you should avoid such companies.

  • Examine institutional investors’ ownership: Institutional investors, like FIIs, insurance companies, and mutual funds, are sophisticated investors, as they have better resources and personnel than retail investors to analyse a company. When such investors increase their stake in a company, it shows their confidence in the growth prospects of the company. This can be a good signal for retail investors to increase their stake in that company.

  • Diversification is important: Suppose a company has only promoters as dominant investors and institutional investors have not invested in it. In such a case, all the decision-making power is with promoters and they may misuse it. Therefore, a retail investor should check how diversified a company’s shareholding pattern is.

Benefits of Analysing Shareholding Patterns

There are many benefits of analysing the shareholding pattern of a company:

  • It can help you understand the direction in which a company is going. For example, if its promoters have reduced their stake to an extent, it can mean that they have sold a portion of their stake to raise capital for future expansion of their firm. Hence, it is possible that their firm will grow significantly.

  • However, if promoters considerably reduce their stake, then it can mean that they are losing confidence in their firm, which is a red flag.

  • Similarly, if FIIs or domestic institutional investors are increasing their stake in a company, it shows that their confidence in the company has increased.

  • At times, institutions sell their stake in many companies. This could be due to liquidity issues or it could be that they think they have earned sufficient returns. Suppose that FIIs have marginally reduced their stake in a company. This in itself should not be seen by retail investors as a sign to sell. Instead, they should see by how much have FIIs reduced their stake in similar companies. If FIIs have reduced their stake in a company by a much higher percentage than in its closest rival, then they might have done it for a company-specific reason.

  • Overall, by analysing shareholding patterns, retail investors can get important signals about their portfolios.

Case Study: Shareholding Pattern of a Leading Company

Let us take the example of Tata Motors, one of the largest automobile companies in India, to understand how to examine the shareholding pattern of companies:

  • In March 2018, as per the data available at the website of the Bombay Stock Exchange (BSE), the promoter and promoter group of Tata Motors owned 36.37% stake in the company, while public shareholding was 63.63%.

  • In March 2024, six years later, public shareholding had dropped to 53.64%, while the stake of promoter and promoter group had increased to 46.36%.

  • Over a period of six years, Tata Motors witnessed a close to 10% drop in its public shareholding.

  • This shows that public shareholders (FIIs, domestic institutions, and retail investors) found Tata Motors more attractive in March 2018 than they found it in March 2024.

  • When public shareholders reduce their stake in a company, its promoters’ stake increases. This happened in the case of Tata Motors in this period. If external investors are not showing as much faith in a company as they were showing earlier, its promoters have to show more faith.

Conclusion

Whether you are a seasoned trader or have just opened a demat account online, analysing the shareholding patterns of companies can provide you with interesting insights. It can tell you which type of investors are showing confidence in a company and which type of investors are losing confidence.

That said, please keep in mind that you should use the shareholding pattern in conjunction with other indicators to make your trading decisions because one indicator alone is never enough.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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