The ownership divergence between Indian companies and MNCs
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Do foreign company promoters have more faith in the India story?
An analysis of Prime Database statistics on shareholding patterns, coupled with additional information from data provider Capitaline, shows that companies with foreign founders have seen a steady increase in promoter stakes over the last 10 years. In the same period, Indian promoters have reduced their stakes in companies run by them.
Promoter holding in local companies has gone down from 55.78% to 47.56% over the 10 years to June 2016—a trend that picked up pace in the past three years.
On the other hand, promoter holding in foreign or multinational companies (MNCs) has gone up from 46.9% to 50.72%. The overall promoter shareholding has fallen from 54.99% to 48.03%.
The analysis covered 1,081 companies.
Promoter shareholding was calculated on an aggregate basis. The total value of all promoter shares was divided by the total market capitalisation.
The government’s divestment programme, a low global interest rate regime and regulatory changes may have also played a role in the change in shareholding pattern. Also affecting it could be the fact that a unique set of circumstances have made Indian businesses more attractive to foreign promoters than they are to Indian ones. This comes at a time when a number of Indian promoters have resorted to stake sales to deal with their debt burdens while others have been required to pare their stake because of regulatory requirements.
The Securities and Exchange Board of India said in 2010 that all listed companies must have at least 25% public shareholding.
Companies were given three years to comply. Government companies had to have at least 10% public stake. This was also later increased to 25%.
But an analysis of companies which didn’t have to reduce promoter stakes also shows that foreign-promoted companies have seen their founders’ stake increase more than other private sector ones.
Consider the difference between companies on the other side of the 75% threshold. Overall private sector companies saw an increase in promoter stakes while public sector ones showed a decline. The divestment programme probably played a role in this. But multinationals showed a larger increase in promoter stake than local private sector companies.
Dharmesh Kant, head of retail research at Motilal Oswal Securities, said that multinationals have an incentive to increase their stake, given that such companies had mature businesses. They don’t require too much investment, but generate a lot of cash.
There is also the fact that growth is viewed in a relative fashion. While Indian promoters may feel that growth is far off its peak, even this low growth is much better than the little or no growth that foreign promoters see in their home markets.
Then there is the access to cheap capital. This makes it a more attractive proposition for promoters of multinational companies to raise their stake than non-MNC promoters, according to experts.
Foreign companies globally have taken on debt at record-low interest rates to buy back shares , including in countries like India. They borrow the money cheap in advanced countries and use it to buy back shares in emerging economies like India. The yield on company earnings is higher than their borrowing costs, which creates an arbitrage opportunity.
“They are quite confident that they would be able to benefit out of the stable /rising growth in India given their brands, access to technology and managerial ability,” said Deepak Jasani, head of retail research at HDFC Securities.
Currency fluctuations acted as a tailwind.
Buybacks picked up in the financial year ended March 2014 (FY14), a year in which the rupee hit a record low of Rs.68.85 per dollar. A falling rupee makes it cheaper for foreign companies to buy stakes in India.
Hindustan Unilever Ltd parent company Unilever Plc raised its stake in its Indian subsidiary from 52.5% to 67.3% for Rs.19,202 crore. Similarly GlaxoSmithKline Plc (GSK) raised its stake in its Indian arm from 50.7% to 75% for Rs.6,400 crore. At least 14 MNCs announced buybacks in FY14, noted this Mint story .
Pranav Haldea, managing director of Prime Database, said the trend is likely to continue.
“I see more companies looking at increasing stake through takeover offers, buybacks and even delistings. A lot of MNCs are going down the path of delisting. It gives them more flexibility in terms of operations,” he said.