Retail investors missing in action

A Mint study of the shareholding pattern of some 1,000 listed companies, ever since the start of the current bull run in April 2003, confirms this trend. Public shareholders have reduced their stake in nearly half of the firms constituting the broadly tracked indices: the Bombay Stock Exchange’s Sensex and the National Stock Exchange’s S&P CNX Nifty. The Sensex, the leading barometer of Indian stock markets, is a basket of 30 blue-chip firms while the Nifty is a broader index of 50 firms.

Of the 25 Sensex companies for which shareholding patterns are available for the period between 31 March 2003 and 31 March 2007, just about half, or 12, have seen a fall in public shareholding. In the case of the Nifty, 21 of the 44 such companies for which data is available, have seen a drop in public shareholding.

On 31 March 2003, the BSE Sensex closed at 3,048 points. The index has risen 300% to 13,072 points as on 31 March 2007. The aggregate market capitalization of the Sensex companies has gone up from Rs3.21 lakh crore to Rs18.34 lakh crore during this period.

Analysts give a variety of reasons for this decline in public shareholding, including the general short-term nature of Indian individual investors, the growing popularity of mutual funds (MFs) as well as the proliferation of foreign institutional investors looking to piggyback on the Indian growth story.

While this study can’t quantify when individual investors sold their stakes, not staying put in some of these indices has meant that individual investors didn’t quite gain—at least directly—from the sharp growth in the Sensex. Meanwhile, most recent regulatory policies, such as rating of initial public offerings, are being driven by the belief that the growing number of individual investors need to be protected.

To be sure, the fall in public shareholding in stocks does not necessarily mean that individual investors are staying away from the market. They could very well be investing in these stocks through MFs, for example. Indeed, holdings of MFs in these companies have gone up during this period.

Says Dinesh Thakkar, managing director of Angel Stock Broking: “Over the past few years, foreign investors’ participation in Indian markets has increased. At the same time, a new set of investors is taking the mutual-fund route to enter the market. These investors are owning companies indirectly through domestic mutual funds."

Out of the 25 Sensex companies, 16 have seen an increase in the stakes held by domestic MFs of between 0.06% and 13%. Similarly, 28 Nifty companies have seen a rise in the stakes held by domestic funds.

Market experts also point out that a fall in the retail shareholding may not necessarily mean that all individual investors are selling their holdings in such stocks. Such a decline can also be a result of additional capital being raised by some of these companies, which could lead to a dilution of retail investors’ share.

“Many of the blue-chip companies have capitalized their businesses several times over the past few years. Some of them have gone and raised cheaper money abroad while others have gone in for preferential allotment of shares. In such cases, retail investors have not had a chance to participate in the growth story," notes Deven Choksey, CEO and managing director at KR Choksey Securities.

Public shareholders have sold their direct holdings in the mid-cap and small companies also. Out of 100 companies that constitute NSE’s CNX Midcap Index, data pertaining to the shareholding pattern is available for 89. In this group, 39 firms have seen a drop in the shareholding of public shareholders.

The mid-cap companies listed on BSE have also shown a similar trend. Of the 196 companies on the BSE Mid-cap Index for which data is available, nearly 42%, or 84 firms, have seen a decline in the percentage of shares held by public shareholders.

Among the CNX Midcap Index stocks, the public shareholding of 39 stocks fell by 0.37-21%. In this group, some public-sector banks have seen an erosion in direct ownership of public shareholders. For instance, in Union Bank of India, the public stake has come down from 28% to 14% by the end of this March.

Similarly, the BSE Mid-cap Index stocks have seen a steep fall in the range of 0.37-52%. Among mid-cap stocks, Jindal Saw Ltd has seen its public shareholders’ stake fall from 22% to 7%. In Lupin Laboratories Ltd, public shareholding has fallen from 23% to 11% during the same period.

Among the large-cap stocks constituting both the Sensex and the S&P CNX Nifty, the fall has been in the range of 0.25-17%, with ACC Ltd registering the maximum decline, from 35% to 18%.

Public shareholders have also exited in large numbers from Hindustan Lever Ltd (HLL), Reliance Industries Ltd (RIL), HDFC Bank Ltd and Hero Honda Motors Ltd. In the case of HLL, the public shareholding has come down from 21.3% to 17.7%. HLL’s share price has gone up 31%, from Rs150 in March 2003 to Rs190 in May 2007. HDFC Bank has given returns as good as the Sensex during the period, but still has seen its public shareholding drop from 24% in 2003 to 13% in 2007. RIL has seen its public shareholding drop from 17.29% to 12.61% during the period. Retail shareholders’ stake in Hero Honda has come down from 15% to 9%.

According to Nilesh Shah, chief information officer at Prudential ICICI Mutual Fund, retail investors generally tend to think that it makes sense to buy and sell at the sight of a slight rise in the markets. “They haven’t really believed in the buy-and-hold strategy," says Shah.

During the past four years, there have been several occasions where a sharp drop in the market over a short timespan took Indian investors by surprise.

For instance, when the Congress-led government came to power at the Centre defeating the Bharatiya Janata Party in May 2004, the Sensex dropped by 23% over 16 trading sessions and cost Rs1.56 lakh crore in market capitalization.

A global market meltdown, too, affected Indian stocks on two occasions over the past year. In 2006, the Sensex slid 30% between 11 May and 14 June and cost Rs4.37 lakh crore in market capitalization. In February and March 2007, it lost 18% and Rs2.53 lakh crore in market capitalization.

Choksey says retail investors tend to get jittery whenever the prices of the stocks they hold start rising above a certain level, which they feel will not be sustainable. So, they tend to exit the high-value stocks quickly. Even a minor fall in indices also makes them nervous. “Which is why they are selling their direct exposure in the equity market," he adds.

SHIFTING PATTERN (Graphic)

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