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India's free-float market capitalization is among lowest in developed and emerging markets due to large shareholdings of promoters
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India’s free-float market capitalization as a percentage of its full market cap is among the lowest in developed and emerging markets because of large shareholdings of promoters, according to Kotak Institutional Equities Research. This is one of the reasons for the country’s comparatively low share in the global indices.
India’s free-float market capitalization is 45.2% of its full market cap for the benchmark S&P BSE Sensex index (see chart).
The non-governmental promoter shareholding is high at 27.8%, followed by foreign institutional investors at 24.1% and government shareholding at 15.3% in the BSE 200 companies in the September quarter of the current fiscal year, says Kotak Research.
There are historical reasons for higher promoter holding in India because most of the companies were family managed and prefer to have higher ownership of their firms so that they can control them.
If the public shareholding remains low and much of the stock is concentrated with promoters, it would mean lower shareholder activism and leave greater room for minority shareholders to be short-changed. This means the chances of a decision being taken or a resolution being passed in favour of the promoter, and which is against the minority shareholder, are high, said Gaurav Mehta,vice-president (institutional equities) at brokerage firm Ambit Capital Pvt. Ltd.
Higher promoter shareholding has left little room to increase India’s weightage in the global indices. The country’s weightage in the MSCI Asia ex-Japan is among the lowest at 9.2%, behind Hong Kong and Taiwan, while in the MSCI emerging markets, India’s weightage is low at 11.4%, according to Kotak
Research.
The government is looking at divesting stake in companies as there are a number of state-owned firms where the government owns more than 80% of the stake. This will increase the free-float, which will lead to better liquidity in the market and more efficient price discovery of the stock, besides helping the government meet its fiscal deficit target.
It should also help in increasing India’s weightage in global indices.
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