Understanding Promoter Holding in a Company

In Sanskrit there is a quote which says ”Yatha Raja Tatha Praja”, meaning as the ruler is so are his subjects. Unfortunately we are not living in the world of kings and kingdoms but that of corporations. These corporations are governed by promoters who hold significant stakes in them and govern their functioning. 

Hence it becomes crucial that investors should examine the promoter holdings for the stocks in their portfolios. In this blog we will learn the details of promoter holding, its significance, calculation method, and the factors to consider when evaluating it.

Who are Promoters?

Under Section 2(69) of the Companies Act, 2013, a promoter is defined as one of the following individuals:

• An individual identified as a promoter in the prospectus or acknowledged by the company in its annual return under Section 92.
• An individual exerting control over the company’s operations, either directly or indirectly, in capacities such as director, shareholder, or other relevant roles.
• An individual whose guidance, advice, or directives are regularly followed by the Board of Directors of a company in their decision-making processes.

What is Promoter Holding?

Promoter holding represents the portion of a company’s shares held by its founders, major stakeholders, or individuals instrumental in its establishment. 

It serves as a measure of their vested interest in the company’s success and growth. Typically, higher promoter holding suggests greater confidence and commitment from those who have played a pivotal role in shaping the company’s trajectory and vice versa.

How to Calculate Promoter Holding

Promoter holding is calculated as the percentage of the total shares held by promoters divided by the company’s total outstanding shares, multiplied by 100.

Why is Promoter Holding Important?

Promoter holding is important for several reasons some of which have been quoted below-

Alignment of Interests

When promoters have a significant stake in a company, their interests are more aligned with those of the shareholders. This is because promoters also benefit from the company’s success, both financially and in terms of reputation. As a result, promoters are more likely to make decisions that are in the best interests of the company and its shareholders, even if those decisions may not be in their own short-term interests.

For example, a promoter may be willing to invest more money in the company or take a lower salary in order to fund a new growth initiative. Or, a promoter may be willing to sacrifice some of their own profits in order to keep prices low for consumers. This alignment of interests is beneficial for shareholders, as it helps to ensure that the company is managed in a way that maximizes shareholder value.

Stability and Continuity

Promoters with a significant stake in a company are more likely to have a long-term commitment to the company’s success. This is because they have more to lose if the company fails. As a result, promoters are more likely to invest in the company’s long-term growth and development. They are also less likely to make short-term decisions that could jeopardize the company’s long-term success.

This stability and continuity is beneficial for shareholders, as it provides them with confidence that the company is well-managed and that their investment is safe. It also reduces the risk of abrupt changes in management, which can be disruptive to the company’s business.

Market Perception

Investors often view high promoter holding positively. This is because they see it as a vote of confidence from the people who know the company best. When promoters have a significant stake in a company, it is a signal to investors that the company is well-managed and has good prospects for the future.

This positive market perception can lead to higher share prices and greater liquidity for the company’s shares. It can also make it easier for the company to raise capital in the future.

Governance and Decision-Making

Promoters with a significant stake in a company have more influence in the decision-making process. This is because they have more voting rights and are more likely to be represented on the board of directors. This influence can help to ensure that the company is managed in a way that is aligned with the long-term interests of shareholders.

For example, promoters can use their influence to prevent the company from taking on too much debt or to block acquisitions that are not in the best interests of shareholders. Promoters can also use their influence to ensure that the company is managed in a transparent and accountable manner.

What is a Good Promoter Holding Percentage?

While there isn’t a universal benchmark, a higher promoter holding percentage, generally above 50%, is often considered positive. It signifies a significant stake in the company and a substantial commitment from the promoters.

Benefits of High Promoter Holding

Long-term Vision: 

Promoters with substantial holdings are more likely to focus on the company’s long-term growth rather than short-term gains.

Market Confidence: 

High promoter holding can instill confidence in the market, attracting more investors.

Stability: 

It contributes to stability by reducing the likelihood of sudden changes in management.

Risks of Low Promoter Holding

Risk of Takeovers: 

Low promoter holding increases the vulnerability of the company to takeovers or external influence.

Short-term Focus: 

Companies with low promoter holding may prioritize short-term gains over sustained growth.

How to Check Promoter Holding of a Company:

There are two ways in which you can check a company’s promoter holding-

Company Reports

There are two types of reports which are published by the companies that can be used to find out about promoter holdings.

Annual Report

The annual report is a comprehensive document that is published by publicly listed companies at the end of each financial year. It provides a detailed overview of the company’s performance, financial position, and future plans.

To find promoter holdings in the annual report, you can look for the following sections:

Shareholding Pattern: This section provides a detailed breakdown of the company’s shareholding, including the percentage of shares held by promoters, non-promoters, and institutional investors.

Corporate Governance Report: This section discusses the company’s corporate governance practices and policies. It may also include information on promoter holdings, such as the names of the promoters and their respective shareholdings.

Quarterly Reports

Publicly listed companies are also required to publish quarterly reports, which provide updates on their financial performance and operations. However, quarterly reports do not typically contain as much detailed information as annual reports.

To find promoter holdings in a quarterly report, you can look for the following sections:

Shareholding Pattern: This section may provide a summary of the company’s shareholding at the end of the quarter.

Stock Exchange Websites

In addition to the company’s annual report and quarterly reports, you can also find information on promoter holdings on the websites of stock exchanges such as NSE and BSE.

To find promoter holdings on the NSE website, you can follow these steps:

• Go to the NSE website and click on the “Market Data” tab.
• In the “Market Data” tab, click on the “Shareholding Pattern” link.
• On the “Shareholding Pattern” page, enter the name of the company and click on the “Go” button.
• The “Shareholding Pattern” page will display a detailed breakdown of the company’s shareholding, including the percentage of shares held by promoters, non-promoters, and institutional investors.

To find promoter holdings on the BSE website, you can follow these steps:

• Go to the BSE website and click on the “Market Data” tab.
• In the “Market Data” tab, click on the “Shareholding Pattern” link.
• On the “Shareholding Pattern” page, enter the name of the company and click on the “Search” button.
• The “Shareholding Pattern” page will display a detailed breakdown of the company’s shareholding, including the percentage of shares held by promoters, non-promoters, and institutional investors.

Factors to Consider When Evaluating Promoter Holding

There are several factors that must be taken into account while evaluating the promoter holdings to identify the quality of a company-

Consistency

Consistent or increasing promoter holding is a positive sign. It indicates that the promoters are confident in the company’s long-term prospects and are willing to invest in its growth.

Reasons for Changes

It is important to investigate the reasons behind any significant changes in promoter holding, such as pledging of shares. Pledging of shares is a process in which the promoter mortgages their shares to a lender to secure a loan. High levels of pledged shares could indicate financial stress on the promoter or a need to raise cash for other purposes.

Industry Norms

It is also important to consider industry norms when assessing promoter holding percentages. Promoter holdings can vary significantly across industries. For example, promoter holdings tend to be lower in capital-intensive industries, such as infrastructure and power, where companies need to raise large amounts of debt to finance their projects.

Sometimes due to regulatory requirements also promoter holdings can have an upper cap. Like in case of listed banks the Reserve Bank of India has made a mandate that promoters can hold only up to 26 percent stake.

Red Flags to Look Out For in Promoter Holdings

Frequent Pledging

High levels of pledged shares could indicate financial stress on the promoter or a need to raise cash for other purposes. If the promoter is unable to repay the loan, the lender could sell the pledged shares, which could lead to a decline in the promoter’s holding and the company’s share price.

Sudden Decrease in holdings

Abrupt decreases in promoter holding could signal a lack of confidence in the company’s prospects. If the promoter is selling shares in the open market, it could lead to a decline in the company’s share price. While this is usually the case, sudden decrease is not always bad. This is because promoter might be selling stake in their company for personal use and not always because company prospects look gloomy.

Corporate Governance Issues

If there are corporate governance issues at the company, it could impact the company’s stability and the promoter’s reputation. As a result, it is important to assess the company’s corporate governance standards before investing in it.

In addition to the above factors, it is also important to consider the following when evaluating promoter holding:

• The promoter’s track record and experience
• The promoter’s reputation for integrity and transparency
• The promoter’s alignment of interests with those of the shareholders

Conclusion

In conclusion, Promoter holding is an important factor to consider when evaluating a company. It is a measure of the promoters’ commitment to the company’s long-term success and their alignment of interests with those of the shareholders. A high promoter holding is generally considered to be a positive sign, while a low promoter holding can raise concerns about the promoters’ commitment to the company and the potential for short-term decision-making.

However, it is important to note that promoter holding is just one factor to consider. Investors should also evaluate the company’s financial performance, management team, and competitive landscape before making an investment decision.

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