Share Holding Pattern – Understand who has more Skin in the Game

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: –

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:-

• Promoter Holding Increasing: If promoter holding is increasing sequentially, it shows promoters are increasing their own investment and are confident about business. They may also believe that the current company’s shares are undervalued.
• Promoter Holding Decreasing: If promoter holding is decreasing sequentially, it raises a red flag and investors should do some digging. Investors should think of leaving the party if owners are selling their shares without any significant reason.
• Mutual Fund & Financial Institution Holding Increasing/Decreasing: Financial institutes are very important too. Understand this, you only investing in the company will not lead to an increase in the share price. If many investors start to believe in this company and start putting their money in, then things will turnaround. Thus, financial institutions bring a sense of confidence in the company’s future growth and prospects.

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.

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