An Overview of the Indian Stock Market

with Emphasis on Ownership Pattern of Listed Companies*
K.S. Chalapati Rao Although audit is the most pressing area for change, it is not the only one. The Enron fiasco has shown that all is not well with the governance of many big American companies. Over the years all sorts of checks and balances have been created to ensure that company bosses, who supposedly act as agents for shareholders, their principals, actually do so. Yet the cult of the all-powerful chief executive, armed with sackfulls of stock options, has too often pushed such checks aside. It is time for another effort to realign the system to function more in shareholders’ interests. Companies need stronger non-executive directors, paid enough to devote proper attention to the job; genuinely independent audit and remuneration committees; more powerful internal auditors; and a separation of the jobs of chairman and chief executive. If corporate America cannot deliver better governance, as well as better audit, it will have only itself to blame when the public backlash proves both fierce and unpleasant. The above is an assessment and warning by The Economist in the context of the collapse of Enron, placed 5th in the latest Fortune 500 rankings of American companies. A number of other disclosures including that of Tyco International, Adelphia Communications, Computer Associates, Qwest Communications, Global Crossing and now WorldCom further deepened the scepticism about the state of affairs in corporate America. Managements, auditors and intermediaries are under the scanner. According to Fortune, Arthur Levitt, former head of the US Securities and Exchange Commission (SEC), said: "America's investors have been ripped off as massively as a bank being held up by a guy with a gun and mask." A SEC press release in the wake of WorldCom disclosure that the company had overstated cash flow by US$4 billion stated: “The WorldCom disclosures confirm that accounting improprieties of unprecedented magnitude have been committed in the public markets”. Close on the heels of WorldCom, Xerox, which had already been fined once before for improper accounting, announced possible scaling down of profits by US$2 billion. Obviously, in spite of the long experience with managing the stock markets, not all is well with the role model for the developing country stock markets. Almost a decade earlier, it required a Cadbury to tell the world that British company boards act as old boy net works and cosy clubs and to emphasise the importance of audit. Incidentally, this was the time when India embarked upon the path of accelerated liberalisation. Since then, development of the capital market has been an integral part of India’s economic restructuring strategy. The Economic Survey 1992-93 observed that the process of reforms in the capital market … needs to be deepened to bring about speedier conclusion of transactions, greater transparency in operations, improved services to investors, and greater investor protection while at the same time encouraging corporate sector to raise resources directly from the market on an increasing scale. Major modernisation of the stock exchanges to bring them in line with world

* Published as “Stock Market” in Alternative Survey Group, Alternative Economic Survey: 2001-2002, 2002.

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standards in terms of transparency and reliability is also necessary if foreign capital is to be attracted on any significant scale. (emphasis added) The past ten years are witness to many changes in line with this objective. Trading and settlement procedures have been improved. New instruments have been introduced. Disclosure levels have been enhanced. Measures to protect investors’ interest and educate them have been initiated at least on paper. A code of corporate governance has been put in place. Steps were initiated to change the organisational structure of the stock exchanges. Notwithstanding these improvements, the experience leaves one wondering how far the heavy emphasis placed on the stock market for allocating resources is justified. Mobilising Resources from the Capital Market The initial euphoria created by liberalisation and scam-induced spurt in share prices helped mobilisation of large amount of resources from the market. Far from raising resources directly from the investors, companies, for the past few years have been, however, resorting to private placements and borrowings (Table-I). Households on their part have been denouncing corporate securities (Table-II). The primary market is practically dry (Table-III). There was, however, a brief upswing in 2000 when the so-called new economy stocks flooded the market with many issues of dubious quality. On the other hand, relative importance of assistance disbursed by financial institutions increased substantially (Table-III, Col. 6).
Table-I Mobilisation of Resources: Increasing Share of Private Placements
Year Total Domestic Issues (Rs. Crores) (1) 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 (2) 14,219 16,366 23,286 37,044 41,974 36,193 33,872 37,738 59,044 68,963 73,922 Of which, Private Placement (Rs. Crores) (3) 4,244 4,463 1,635 7,466 11,174 13,361 15,066 30,099 49,679 61,259 67,500 Share of Private Placements in Total (%) (4) 29.85 27.27 7.02 20.15 26.62 36.92 44.48 79.76 84.14 88.83 91.31

Source: National Stock Exchange, Indian Securities Market: A Review, Vol. IV, 2001.

Thus, as things stand today, one hardly sees any evidence of the corporate sector raising resources directly from the market on an increasing scale. While the stock market has receded, the financial intermediaries staged a comeback during the second half of the 1990s (Table-IV). Compared to the initial days of liberalisation, now there does seem to be a better recognition of the need for financial intermediation. RBI in its Currency and Finance: 2001, observed that:

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51 10.01 3.58.699 87.26 2.85 7.143 82.26 9.09.60 0.21 1996-97 1.96 7.70 2.On balance.35 1992-93 80.88 16.24.84 1991-92 68.98 10. In the present context of financial liberalisation.11 0.94 9.69 1995-96 1.38 1997-98 1.338 68. Deposits Debentures and Provident & Units of Mutual Pension Fund and Funds Claims on Government (1) (2) (3) (4) (5) (6) 1990-91 58.87 3. (3) to (6) do not add up to 100.65 2. Crores) Insurance.14 3.74 2000-01 2.618 64. Note: @ Other investments are not shown here. it is desirable to have a diversified and balanced financial system where both financial intermediaries and financial markets play important roles in imparting greater competitiveness and efficiency to the financial system.518 68.51 Source: Reserve Bank of India. Bank Deposits.90 1999-00 2. the coexistence of both systems is socially desirable not only because it encourages competition. and helps improve resource allocation within the economy.501 69.97 2.18 2.664 82.83 3.61 0.09.354 68.60 5.18 4.44 5.22 6.61 7.35 1998-99 2. Table-II Shares of Select Items in Changes in Financial Assets of the Household Sector Year Changes in Percentage Share in (2) of @ Financial Assets Stocks.908 73.24 -0. Hence percentages in Cols.63 9.68 0.18 8. but also because it reduces transaction costs within the financial system. Life Non-Bank UTI Units (Rs.44.71.740 86.39 4.92 2.39 3. 3 . stock markets and banks emerge as sources of corporate finance and stock market development actually tends to increase the quantity of bank loans through improved debtequity ratios.79 10. Thus.99 13.98 1993-94 1.45.64.045 62.29 1994-95 1.

=Not Available. without adequate preparation or understanding of the behaviour of the financial sector and of the major players -.670 842 102 48 79 145 15 Of which. promoters.8 2.424. i) 1985-86 to 1989-90 2 18.184.4 1.) of Issues (Rs.5 5 859.54 72.548 17.948.1 4. Ratio of (5) to Assistance Disbursed by Financial Institutions (%) (7) 33.312.4 19.2 5.3 368 1.856.267.325.66 38. laxity and lacking in proactive approach. N.5 134 2.A.9 8.430.3 805 6.997.3 5.162.169. Cr.756.A.964.1 5.414.1 653. There are comments galore at the serious problems of insider-trading and price manipulations. Investigations have been long drawn and even when actions were taken.133 1. (1) to (6) are based on RBI data and Col.040 1.5 1995-96 to 1999-2000 4 19.5 10. as a part of the ‘shock therapy’. The diversion of funds from the banking system led to zooming of share prices to unprecedented levels within a span of three months (Jan-Mar 1992) during which time the BSE 4 .7 1.intermediaries.598 11.116.Table-III New Capital Issues by Non-Government Public Limited Companies and Assistance Disbursed by Financial Institutions Year Total Number of Issues (1) 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 P 1999-00 P 2000-01 P 2001-02 (Apr-Jan) (2) 364 517 1.2 22.5 (6) 127.462. (7) on NSE. Instead of trying to address the problems.7 16.138.330.3 26.3 1.013. they were turned down by the appellate authority. Table -IV Financing of Non-Government Non-Financial Public Limited Companies by Financial Intermediaries vis-a-vis Capital Market (Percentage share in total share of funds) Category 1 Capital Market (Debentures + Paid-up Capital) ii) Financial Intermediaries (Banks and FIs) Source: Reserve Bank of India.562.60 78.5 1. and even ignoring the experience of the 1980s when initially the stock market was given a major push. Cr. Source: Col.803.284. The gates were thrown wide open as it were.) included in (5) (3) 4.86 N. investors and the regulators – in a country like India.678 1.09 85.8 19. IV.959.40 5.5 (4) (5) 246 1. Result: a series of scams of varying gravity with the regulators getting the blame for inexperience.153.4 33 2. The first major scam was perpetrated by Harshad Mehta.9 227. Vol.85 8.59 7.1 3.7 69 2. 2001.2 Hasty Liberalisation? The decision to increase the role of stock market was taken.4 1.2 1990-91 to 1994-95 3 26.416.0 89 1.6 983 9.70 41.752.952.0 20.3 4. Indian Stock Market: A Review.117.51 6. those in authority often sought to shift the responsibility onto one another.39 24.3 868 9.5 5.0 18.9 3.A.731.464. Ordinary Shares Amount Number Amount Share Premium (Rs.3 N.666.8 4.

Taking advantage of free pricing of issues. In terms of numbers. the National Stock Exchange (NSE) concluded that the households lacked “experience of stock market operations”. UTI’s US-64 troubles. Another major scandal of the initial period was the promoters. how long would the good feeling last? Many a time the market fell steeply not only because of scams and other economic factors but also due to political.000 to 4.400. sanctions following nuclear tests. Shoes. shares of even loss-making companies commanded high premium.000 crores. further contributed to the difficulties by periodically depressing the market. Apart from the doubtful quality of many of the new issues. The company was accused of inadequate disclosures. Enthusiasm is being whipped up by the financial press to attract the individual investor back to the market. misdemeanors of the so-called plantation companies and the turbulence in the NBFCs with the CRB group in the vanguard hurt the secondary market and further eroded investors’ trust in the stock market. In the postliberalisation period a good number of companies were not only non-manufacturing ones. Based on a SEBI-NCAER survey which found 80 per cent of equity investor households to be first generation investors and majority of equity-owning households having an inadequate diversification of portfolio – only about 5 per cent invested in more than 5 companies. defence. A number of public issues were made without any critical scrutiny. terrorism – national and international – factors. about one-third of the issues were by financial companies with a preponderance of non-banking financial companies (NBFCs). Tata Consultancy Services (TCS) is expected to lead the pack and raise between Rs. This enabled many non-serious and fraudulent promoters to take advantage of the policy vacuum.000-5. The Reliance share switching scandal. East Asian financial crisis. Primary market scam of the mid-1990s. newspapers have been projecting revival of the primary market with a number of IPOs during the second half of this year. During the boom period. About 84 per cent of the households invested in equity shares through the primary market – in the all-enveloping euphoria investors probably flocked to new issues to make quick money rather than making informed long term investments.S. many companies charged high premium. who can guarantee that there won’t be another scam or a major adverse event 5 . But the post-listing returns proved to be disappointing. war fears. communal. Of late. Given the circumstances of India. issuing themselves preferential shares at prices far lower than the then prevailing market prices. communal disturbances -. an important case which shook the markets in early 1995 was the Rs. Apart from many other questions. These observations show the unsuitability of shock therapy which took the form of sudden switching over to free pricing of issues on the one hand and removing entry restrictions on the other. given the kind of shocks the Indian stock market is prone. Obviously. etc. some of which we shall address a little later. 350 crore Fully Convertible Debentures (FCD) issue of M. This gave rise to a false impression of the windfall gains that could be had from the stock market and created a `herd’ mentality. 4. In addition. which meant unscrupulous fly-by-night promoters made good with public money and some of them even ‘vanished’ after collecting funds from the public. severely shook the confidence of the individual investors. especially MNCs. an important one in this sequence. the experience proved quite costly both for the investors and the economy. but the purpose of issue also varied from project finance to working capital. The public issues that are in the pipeline would definitely seek a high premium.the latest being the Gujarat carnage. gross disappointment with Morgan Stanley’s Mutual Fund issue.Sensitive Index (Sensex) more than doubled from about 2.

which were relaxed in the new regime. (i) It is well known that many large private sector companies were being controlled by the industrial Houses in spite of having small shareholdings due to the support extended by public financial institutions. These managements faced a severe threat of losing control. appears to be acquiring/retaining/strengthening control over other (as also group) companies rather than getting better financial returns from such investments.that would trigger a fall and wipe out all the gains and bring the market back to square one? An equally important point is how the funds mobilised/owned by the companies are being utilised. Once loans and investments are made. Such phenomenon is more prevalent in profit-making companies. therefore. may be tightened again to prevent misuse of subsidiaries and other companies to route funds into the stock market. were. Resorting to heavy outside investments and advancing of loans out of borrowed funds increases not only the cost of funds for the investing company but also exposes the company to default risk. The average returns from such investments. For large companies to emerge and function effectively. alternatively who provide the risk capital: promoters. there is a need to pool risk capital which individual entrepreneurs cannot bring in on their own or with the help of relatives. The main purpose of the investments. a few factors are expected to influence the shareholding pattern. or individuals who are the focus of many a debate on the stock market (the endeavour has been to bring the small investor back to the market) and from whom resources were to be collected directly? Compared to the earlier period. There is growing importance of group companies and non-marketable securities as also advances to group companies in such outside investments. intermediaries (broadly defined to include a variety of financial institutions). The need for such capital is expected to increases with size of the enterprise. promoters have been allowed to increase their stakes gradually without the obligation of making an open offer to the other shareholders. Within the profit-making companies those who increased their borrowings invested relatively more than the rest. It is important to note from press reports that the government is setting up a Central Listing Authority (CLA) which would oversee issues and listing at the stock exchanges and monitor use of issue proceeds. in the new regime. In a tacit recognition of this fact. especially to foreign companies. however. This only means that the Capital Issue Control which was abolished in the wake of liberalization would be making a comeback albeit with a different name and scope. This should be construed as an acknowledgement of the misuse of the freedom by corporates and the intermediaries. It is also being reported that norms for inter-corporate investments and loans. In a study conducted at the ISID it was noticed that companies of different sizes extended loans to or invested in other enterprises in a big way. directors and shareholders of the investing company would have no further control over the utilisation of funds. lower than the average interest rate paid out by the companies. 6 . friends and acquaintances. What is the position that is emerging now? Who own listed companies or. Disintermediation? The basic purpose of stock market is to provide capital for investment and for the investors liquidity. following liberalisation of the economy.

are presented in the following. however. Early this year. Mumbai (BSE) which has a large number of companies listed. Some of them have either got already delisted or are on the verge of delisting. knowledge and resources to make right investment choices on the stock markets. the simplest being cross-holding of shares. While there is a general ceiling of 24 per cent. due to open offer. The limits have been. listed affiliates of foreign companies tended to acquire subsidiary status. Expert analysts of these funds are expected to take informed investment decisions. the new promoters would have to make an open offer to the remaining shareholders. following again the US model that individual investors do not have the time. ceilings were introduced on overall and individual FII shareholdings. One of the ways of looking at the importance of different categories of shareholders is through the total value of their investments at any given point of time (called market capitalisation) instead of the nominal value of shares held by them. sectoral caps for FDI have been made the limits for FII investments as well. other relevant data has been put together from different sources. This is measured as the product of number of shares multiplied by the 7 . Limits on inter-corporate investments have been liberalised thereby enabling companies engage in a variety of inter-corporate relationships. Crossholding obviates the need to mobilise additional resources by the managements for strengthening control. Convertibility clause whereby term lending institutions had the option to convert certain portion of their loans into equity has been withdrawn. Possibly due to such a perception. The crux of the issue is: who own corporate India? What is the extent of shareholding of individual Indian investors who actually represent the disintermediation phenomenon? What is the extent of foreign portfolio investments which are a major focus of policy towards stock market? How relevant are the ceilings placed on FII investments and how widespread are these investments? How much inroads mutual funds could make? Preliminary results of an ongoing study at the ISID of the shareholding pattern of companies listed at the Stock Exchange. non-promoter shareholding can be as low as 10 per cent. A conscious effort also has been made to promote mutual funds. As per the official guidelines. it would be relevant to examine the present shareholding pattern of listed companies. With the relaxation of limits on foreign direct investment (FDI) in individual enterprises. While the shareholding data was collected from the BSE Website.(ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) Companies have been allowed to buyback their shares in the process of which the controlling interests increase their stakes without putting their own money. The ceiling was earlier 25 per cent. increased progressively. controlling interests’ stake increases because on top of the shareholding acquired from the existing promoters. Given these changes. In a typical takeover case. It was initially felt that the foreign institutional investors (FIIs) could connive with foreign companies in taking over Indian companies. in individual cases companies can decide to raise the limit up to 49 per cent.

46 8 .10.71. The exercise could not be conducted for all the companies due to limitations of time as also lack of detailed information.794 1. 2002 was Rs. 6.g.60 12. Promoters indeed are likely to keep certain of their entities out of the ambit for a number of reasons. In some circumstances. one rationale could be that they would not gain anything by claiming an investor to be associated with the promoter. From Table-V it can be seen that the promoters – both Indian and foreign as also entities acting in concert with them – have already acquired nearly half of the total market capitalisation. Crores) (2) 6. 6. If such holdings are also taken into account it is likely that overall share of the promoters may well exceed half.prevailing market price summed for all the listed companies. the address of a ‘non-promoter’ corporate shareholder was that of the company’s Chairman himself! Interestingly.40.36. BSES and ITC). The shareholding data refers in nearly 90 per cent of the cases to March 2002. In some of the extreme and large cases we tried to reclassify the shareholdings of controlling interests appearing in other categories. individual shareholders and NRI/OCBs. That we could get the data of only a little less than half of the companies listed at BSE may be an indication of the poor state the remaining are in.045 crores. In one case.507 nongovernment listed companies for which shareholding data was available was Rs.11. in which the government would in any case have a majority shareholding.741 30.045 6.574 companies for which shareholding data is available $ MCAP of 67 public enterprises (within B) MCAP of 2.634 4.08. and in the remaining to December 2001.(C) Composition of (D) 1) Indian and Foreign Promoters including persons acting in concert with them 2) Institutional Investors (a) Foreign Institutional Investors (FIIs) (b) Banks & Financial Institutions (c) Mutual Funds 2. market capitalisation of 2.281 53.033 47. MCAP of 2.85 24.21 6.93 5.506 24. 4. Keeping certain shareholdings out of the promoter group also helps to ward off the threat of delisting. a few large companies did not claim that there were any promoters (e.11. A closer look at the disclosures made to the Exchange suggests that promoter shareholding could still be hidden in the form of other corporate bodies.794 crores. It is also possible that the narrowing of the definition of relatives under the Companies Act gave the promoters flexibility to keep investments of close relatives outside the promoter category. Leaving aside the 67 listed public enterprises.574 companies for which we could get the latest shareholding data was Rs.597 1.507 Non-Government Companies (B) .00 Share in Market Capitalisation of nongovernment companies (%) (3) (1) A B C D Total Market Capitalisation (MCAP)# Of which.36. The MCAP of 2.160 100. market capitalisation (MCAP) of listed companies on April 11. Apart from narrowing the scope of insider trading investigations. Table–V Share of different Categories of Shareholders in Market Capitalisation Category Market Capitalisation (Rs.246 crores. According to one estimate.40. fights within controlling families could be responsible for not naming certain entities as promoter shareholdings. ACC.

some of which could be listed companies themselves.50 17. surprise anyone.3) General Public: Indian 4) Private Corporate bodies 5) Non-Resident Indians and Overseas Corporate Bodies (OCBs) controlled by them 6) Others (including GDRs) # As per data accessed from www.capitalmarket.37 per cent of TELCO’s equity.00 In terms of numbers also. Interestingly. promoters have a majority stake. 50 crores market capitalisation (TableVI). while TELCO holds 4.582 17. the total cost of acquisition of shares in the two apex companies by some of these listed companies was more than Rs. TISCO in turn holds 9.76 5. At the end of 2000-01. 79. A limited analysis of the shareholding pattern of Tata House companies reveals that in a majority of the cases.086 17.00 Companies having Rs. Cr. It could be provided by other companies controlled by the group. therefore. If the investments of listed companies of the group in Tata Sons and Tata Industries.) Total Average (4)/(3) 9 . The available data does not facilitate a comprehensive examination of this phenomenon.68 per cent of equity of TISCO. are also taken into account. 50 crore or more of MCAP No of Companies Per cent to Total (4) 13 24 94 65 202 73 471 (5) 2. Such investments while lessening the risk borne by the promoters enable them exercise disproportionately greater control over the companies involved. $ MCAP was available for 2. however.10 19. The recent attempt by the group at making VSNL invest in Tata Teleservices should not. Table-VI Distribution of Companies according Promoters’ Stake Promoters’ Shareholding (%) (1) Less than 10 10 – 25 25-40 40 and up to 50 More than 50 and up to 74 More than 74 Total All Companies No of Companies (2) 86 197 539 439 952 294 2.055 companies.97 3.com on April 12. need not always be held by the promoters themselves in their personal capacity.50 100. investments by other listed companies of the group and their subsidiaries contributed significantly to the promoters’ stake. which in turn hold stakes in many of the group’s listed companies. 400 crores.43 7. The incidence of majority promoter ownership is more prevalent in case of large companies with more than Rs. in roughly half of the companies.86 21.73 100. 2002.80 42.59 4.997 17. the group’s strategy of using listed companies’ money to bolster its control becomes quite evident.51 37.507 Per cent to Total (3) 3.97 11.617 1.99 6. Promoter’s stake.96 13.89 15.00 Table-VII Distribution of Companies According the Share of General Public General Public Shareholding (%) No of Companies In the Range Out of which MCAP is available Market Capitalisation (Rs.

88 33.46) 39.92 49.00 (1) Not Traded at all Less than 25 days 25 – 50 days 50 – 100 days 100 – 150 days More than 150 days All Companies 746 Note: Total number of trading days – 247.. In contrast. Table-VIII Distribution of companies according to number of trading days and Extent of shareholding by the Indian Public Companies with shareholding of General Indian Public No. cent No.90 50.65 100.54 79. of Cos. the average trades per day were two or less. there was nil trading or the total number of trades were fewer than 62 i.761 companies (about 70 per cent of the total) in which shareholding of the general public is less than 40 per cent of the total equity of the respective companies (Table-VII). in close to half of the cases. Thus.507 (3) 170 642 642 273 271 544 1.36 9. Significant direct shareholding of the public is thus limited to just about 30 per cent of the cases only. Once again.45 39. In two-thirds of the cases.63 47.145.91 28. While no trading took place in 139 cases.58 There are 1.57 5.45 54. In a little less than half of the cases. it is even worse..69 64. In the remaining 746 companies the share of public was 40 per cent or more.46 58. companies with less than 40 per cent public shareholding fared somewhat better. its constituents are quite small either because they have a small capital base or their share prices are so low that the market capitalisation turned out to be extremely small.21 72. of Cos.55 100.54 7. of days traded 40 per cent or more Less than 40 per cent Cumulative Per Cumulative Per No.46 11.00 (4) 262 327 114 168 160 730 1761 (5) 14.085. In the context of disintermediation this is an extremely relevant group and hence needs a closer look. while there is lack of liquidity in general.57 18. An important feature of this group is that. less than one-tenth of the total number of days traded) are also taken into account.150. for the companies having relatively larger pubic shareholding. less than 1 trade in four days.020. if the ones traded on less than 25 days (i. going by the market capitalisation of the companies for which MCAP is available.97 1.e. there is very little trading (Table-VIII).e.646.994.(1) Less than 10 10 – 25 25-40 40 and up to 50 More than 50 (Above 40 Total (2) 253 745 763 357 389 746 2.272. 10 . companies with lower share of outside individual investors were somewhat in a better position. cent (2) 139 215 54 71 63 204 (3) 18.998 (4) 5.79 3. That the trading that had taken place in the 746 companies could be nominal is evident from Table-VIII.80 (5) 33.22 77.

10 86. leave alone the general public! Similar would be the case with Infosys which is reported to have raised the FII investment limit to 100 per cent. 63. FIIs had a presence in 633 companies (Table-X). What is the point in such companies being listed on Indian stock exchanges? Would it not be then more appropriate for them to get traded on London or New York stock exchanges instead of in India! What is equally important is that out of the total market capitalisation of Rs. or roughly US$ 12. FIIs are the most important category followed by banks and financial institutions and mutual funds (MFs). followed by the 24-40 per cent group. Assuming that FIIs will take up all that equity and Hindustan Lever being a foreign subsidiary with 51 per cent foreign shareholding.the main ceiling.761 14.500 500 .1000 1000 . of Cos. Among the companies under study. Institutional Investors Next in importance is the broad category of institutional shareholdings which amounted to close to one-fourth of the total MCAP (Table-V).574 companies.2500 2500 –5000 5000 + All Companies It thus appears that the individual investors are stuck in companies whose shares are hardly traded.Table-IX Distribution of companies according to number of trades and the Extent of shareholding by the Indian Public No. They cannot get out even if they wish to because there are no takers. in as many as 340 cases FII holdings were less than 1 per cent of the total shareholding of the respective companies. Cumulative Per cent (4) (5) 262 332 85 106 125 150 179 134 388 1. top 10 companies account for as much as 61.56 44.79 66.00 Less than 40 per cent No.02 59.00 (1) 0 <62 62-125 125 . In only 9 cases FII holding was above 24 per cent -.63 48. However. Out of the 2.99 81.88 33. Given the possibility that some of the FII investments could as well be Indian money coming back.79 54. the actual number of companies with ‘real’ FII investment could be even less.62 73.191 crores. nothing will be left for the Indian shareholders. The problem could be even more serious because many of the listed companies whose shareholding data is not available are likely to be similarly placed. HDFC is the only company having more than 40 per cent FII shareholding. owned by FIIs. of Cos.36 77.46 100. Interestingly.8 billion according to the present exchange rate. Sensex (30) companies account 11 .97 100. Cumulative Per cent (2) (3) 139 225 39 43 51 55 53 40 101 746 18. Within this. It is interesting to note that Hindustan Lever got shareholders’ approval for 49 per cent FII equity.68 60.250 250 . of Trades in 247 days Companies with shareholding of General Indian Public 40 per cent or more No. The 10-24 per cent group is the most important one in terms of market value of investment.73 38.19 70.58 51.73 per cent and the top 25 account for over 85 per cent (Table-XI).

121 4.772 2.191 47. It is not necessary that not all the unit holders are individuals and not all the funds with MFs are invested in equity shares. only a few listed companies are relevant and the ceilings on FII investments are irrelevant in an overwhelming number of cases.60 3.00 75.16 100.11 1.94 2.400 63.84 3.65 95. share of the public would be less than one-fourth of the total. Next important category of institutional investors is that of mutual funds (including UTI).16 10.75 100.417 (1) Top 10 Top 25 Top 50 Top 100 Total for 633 Companies Sensex 30 BSE 100 Nifty (50) Nifty Junior (50) Per cent to Total (3) 61. Table-XI Share of Top companies# in Market Value of FII Investments@ Category Market Capitalisation (Rs.) (4) (5) 259 0. While MF investments are in about 1.78 63.X Distribution of Companies and with FII Investments and Market Value of the Investments Share of FIIs Companies with FII Investments Number Per cent to Total (2) 340 56 106 58 64 8 1 633 1.847 26.36 98.26 0.400 companies.75 9.for about three-fourths of FII investments and NSE Nifty (50) companies account for nearly 90 per cent of their investments.757 51.010 54. This may indicate how FII trading could affect the two most popular stock exchange indices. Cr.17 36.71 8. Table .66 3.) (2) 39. Note: PSEs which were left out of the earlier tables are taken into account here.941 (3) 53. Bulk of the investment is in the form of debt. A quick estimate suggests that at the end of May 2002.310 56. Thus if the objective is to attract FII investments. Banks (including those belonging to the private sector) and financial institutions hold less than 7 per cent of the market capitalisation thereby indicating their limited role in the new environment. 100 top companies account for over 90 per cent of the total investment.125 60.191 100. Even if all the investment held by MFs is credited to the Indian public.258 62.20 89.41 382 0. 1 lakh crores assets of the MFs.58 81.73 85. Cr. which are looked upon to mitigate the problems of small investors.652 5.85 16.82 12 .633 4.297 57. certain questions arise regarding the investments of MFs.00 (1) 0–1 1–2 2-5 5 – 10 10 – 24 24 – 40 40 + All# Nil # Including 20 companies for which market capitalisation is not available. However.44 16. equities accounted for a little less than 30 per cent of the total net assets of a about Rs.00 Market Value of FII Investments Amount Per cent to Total (Rs.

Face value of Grasim’s dealings were nearly Rs. Tata Power Ltd. It is said that while during 2001-02 MFs mobilised Rs. In a few MF schemes. Incidentally. 59. Among the companies which accounted for more than 5 per cent of the total net assets of certain MF schemes at the end of March 2002 are: Bharti Televentures. The investor likes choice. Evidence indeed points to the dominant role played by large companies in MF transactions. a significant proportion of which being that of the group’s MF. Hindalco dealt with more than 175 crores units. 8. Another observation regarding MFs is that most schemes invest in only a few companies. Could the ordinary investors have invested so much in MFs and would they be churning their MF portfolios so vigorously? While this requires a closer examination. Interestingly.97 crores. making it difficult for the small investor to choose the best and appropriate one. Hindalco Inds Ltd. Correspomding figures for Bharti Televentures. the redemptions were as much as Rs. Rs. PSE are included here. 1. this amount is equivalent to about two-thirds of total value of MF investments covered in Table-V. Ltd. The amount covered in Table-V is also very close to the share of equity in net assets of MFs arrived by us.900 crores. the ones who really matter (in terms of net assets) are about half of the total. (ii) given their functioning. Often.68 It is a fact that apart from individuals many large companies and banks invest in MFs.64. An important factor is that while there are 37 MFs (including UTI). 834 crores. MFs may not be the right choice to mitigate the problems of small investors. A few points need to be considered here: (i) MFs’ involvement takes away the real essence of raising resources directly from investors. Hero Honda Motors Ltd. (iii) the involvement of MFs and other institutional investors may in fact be adversely affecting the liquidity of many companies.000 crores respectively. it further indicates the possibility of large investors being behind the volumes and MFs may not after all be the vehicles for investment of small investors alone.199 93. Hindustan Lever Ltd (HLL) invested close to Rs. 4.Nifty + Nifty Junior (100) @ As in Table-X. outnumbering the active scrips. Practically all of its portfolio of MF investments was acquired during 2001-02. and (iv) there seems to be a degree of cross circulation of funds between companies and mutual funds. ICICI Ltd. thereby creating a situation of money chasing money. 1. Though direct comparisons are not appropriate. For instance. Bharti went public towards the end of January 2002 and raised about Rs.500 crores and Rs. HDFC Ltd. te total purchases and sales of MF units by Tara Power Co.000 crores.700 crores.57. quite a high proportion of MFs’ assets belong to companies themselves.752 companies and banks covered in the Prowess corporate database of CMIE worked out to almost 16. just one or two investors accounted for an overwhelming part of the net assets of the respective scheme. In a sense. ITC Ltd.400 crores in MFs at the end of 2001 while MFs’ investments in HLL are valued at Rs. Indeed as NSE put it : “…proliferation of number of MFs and their schemes has made investors as bewildered as they are with securities. etc. but he is lost with too many choices”.347. On the other hand the MFs operate about 600 schemes.674 crores. # In terms of value of FII investments.523 crores. 13 . the lists of such companies overlap. Hero Honda Motors and ITC were about Rs. 900 crores. 1. 6. HCL Technologies. For instance. Grasim Inds. During 2001-02 were about Rs. 3. Investments during 2000-01 in MF units (including UTI) by 4.

September 11 terrorist attack in the US. 10 each of SPP. It does appear that wherever shareholding of private corporate bodies is large. One also finds many investment and trading companies among the private corporate bodies category. in quite a few cases the relationship of these companies with the promoter groups is obvious.00. Table-XII Distribution of Companies According to the Shareholding of Non-Promoter Private Corporate Bodies Share of Private Companies in Equity (%) (1) Less than 2 2–5 5 – 10 10 – 25 25 and above All Companies No. Table-XIII Market Turnover and Market Capitalisation of Listed Companies Year NSE (1) 1990-91 1991-92 1992-93 1993-94 (2) DN DN DN DN Market Turnover BSE All-India (including others) (3) (4) 36.780 4.28.696 84. war threat and the communal holocaust in Gujarat. the possibility of such companies being related to promoters is quite high.106 2. however. 71. The two non-promoter corporate bodies reported in case of Blow Plast also could be traced to Piramals. December 13 attack on Indian Parliament. SPP.250 shares of Rs.00.705 (Amount in Rs.536 2. Both ASE and Nicholas Piramal hold 2. as noted earlier.574 Market Trading Table-XIII shows a tremendous growth in market turnover and market capitalisation of listed companies during the post-liberalisation period. shareholding of other corporate bodies is quite low (See Table-XII). Some of these have their registered offices at places where a number of such companies have been registered over the years.012 N. This indicates the possibility of channeling black money into the stock market and/or the companies being used by stock brokers. In most cases.279 3. 45.A.777 N. is that. in Ambalal Sarabhai Enterprises (ASE). What is more relevant.A. the 14.54. suffered a major set back during 2001-02 as a result of the exposure of scam allegedly involving Ketan Parekh.Private Corporate Bodies From Table-V it was seen that companies other than the ones included under promoters and persons acting in concert. it should be expected that threat to incumbent managements would come mainly in the form of corporate bodies. For instance.10. could thus be a 50:50 joint venture of the two companies.99 per cent of MCAP. The figures. Tehelka exposures. of Companies (2) 809 621 447 480 217 2.78 per cent holding of Sarabhai Piramal Pharmaceuticals Pvt Ltd (SPP) is shown as non-promoter holding. Cr) All-India Market Capitalisation (5) 1.03.25. Apart from FIIs.077 14 . account for 3. It would be illogical to expect that SPP would not support the promoter group. however.

Interestingly.688 companies for which stock transaction details are reported in the Stock Reach pages of BSE and collected on 3rd and 24th June 2002. 2002 because correspondence addressed to these companies at their last known address was returned undelivered by the postal authorities for reasons such as "not known". the low level of trading in many of the scrips is accompanied by large volumes.287 2.27. 482 of these were delisted because of non-payment of listing fees. And these continued to be the market favourites in 2001-02 as well.1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 DN= Did not exist. The lopsided emphasis on these stocks has been created and sustained by the institutional investors and has also been manipulated by scamsters. only 3. there is excessive concentration in trading. at the NSE.400 companies (24 per cent of total) were traded on less than 50 days during 2001-02.032 3.67.74. In addition. For instance.510 5.064 11.23. "shifted" etc.39.07.691 10.A. top 50 companies account for nearly 92 per cent of the total turnover.e.415 were suspended from trading and 2. the share of IT sector would be at least 61 per cent of the total. A cursory look at the quarterly results does suggest such a possibility. it becomes evident that as many as 2.11.193 4. those in information technology accounted for as much as 67 per cent of the market turnover. In many of the cases trading was only nominal. 15 .403 3. about 1. 3.70. the huge number of companies whose shares are not traded are as good as vanished because he cannot hope to recover even a fraction of his investment in such companies. 571 companies.031 28. as far as the investor is concerned.284 2.. Out of the top 10 most active shares at NSE during 2001-02 (in terms of market turnover) all except Reliance Industries were new economy stocks.85.223.73.681 20.257 4.92.08. has been accompanied by heavy concentration in a few companies and sectors. 2. quite a few were traded infrequently. Sectoral concentration is evident from the fact that out of the top 50 companies.535 were placed under the ‘Z’ group (of companies not complying with certain listing requirements). This overall growth. In any case. Even among the 3.95.057 2. which have already been suspended from trading have been placed by BSE under the ‘Unknown category’ as of 15 June.064 1.13.39. The volumes were driven by the so-called new economy stocks in 1999-00 to an all time high.A 4.00.782 companies were listed at BSE at the end of March 2002.052 13. A good number of these may well be existing only on paper with virtually no activity.999 6.644 3.167 67.72. This number is quite large compared to the 229 “vanishing companies” reported recently by the Ministry of Law Justice & Company Affairs.46. NA=Not Available 1. In all.89. The insignificant trading in many scrips indicates the possibility of many duds being listed at BSE.399 companies were either suspended or were placed under ‘Z’ group.028 10.116 9.332 5.559 companies (44 per cent of total) were not traded at all during the year. From the BSE website it has also been noticed that while 629 companies were delisted. however.292 1.07.805 67.88.863 N.630 7. While 5.816 5.368 6. Thus even in the unlikely situation of there being no other IT company in the remaining ones.223 were traded any time during 2001-02 i.64.24.349 5. Indeed.990 N.68. Out of the 5.474 8.80.749 50.14.

the private managements have been quite active in developing a code of corporate governance probably to convince the world that they are capable of selfgovernance. the models India and other developing countries are seeking to adopt. however. however. nullified due to poorly drafted rules. political interference and outright negligence and corruption. the few winners get a part of the money put in by all other purchasers of that lottery’s tickets. Capital appreciation in crude terms. If promoter shareholding can be as high as 90 per cent. These are based on the assumption that there is a complete division between managers and shareholders. hostile takeover bids are unlikely to succeed. Auditors on their part had to disclose the reasonableness of transactions with related parties. and individuals have very little stakes. there is no question of the enterprise getting constrained due to lack of funds if it had not got listed. is nothing but one investor who thinks that he can get a better deal from yet another investor giving it to another investor. these were. the listed companies will be no better than lottery counters. a question arises about the disintermediary role of the stock market. In a lottery. great falsehood is being perpetrated in defining ‘companies under the same management’ under the Companies Act. Given the shareholding pattern. The premium that such a company charges while making the public offer would be more often than not unjustified. Following Cadbury Committee’s recommendations and the East Asian financial crisis. The shareholding pattern witnessed above is hardly conducive for the market to play its role. One cannot get help drawing similarities between lottery and the stock market. The one who is running the lottery doesn’t give away anything. What gets distributed as dividends is relatively a small amount. It is not as if Indian policy makers were ignorant of the need to regulate managements. Since the managers cannot be trusted to put the investors’ money to best use and in the long term interest of the enterprise. Given such high promoter stakes. What significance can one attach to market capitalisation in the face of such high stakes by the promoters? If turnover also is so highly concentrated in a few scrips and sectors of what relevance are the comparisons with GDP and the inferences drawn on the basis of such indicators of ‘capital market development’? Is 16 . In India. There were limits on managerial remuneration and inter-corporate investment and loans. It has now become a paying proposition for many to talk of the issue. On the other hand. That leaves capital appreciation as the main attraction of the stock market. the market is expected to monitor and discipline them. the issue of corporate governance has occupied centre-stage. In fact. the real owners of enterprises. weak definitions. A related issue is based on the experience of US and UK. In spite of these limitations. There is no question of the general public benefiting from the fruits of enterprise. Many of these had to be introduced both with a view to improve disclosures as also in response to the misdeeds of certain industrial Houses. For instance. analysts pointed out how involvement of nominee directors improved company boards’ functioning. interestingly. In practice. One of the objectives in appointing nominee directors by financial institutions was to keep a close watch on the managements and make the company boards function effectively. nearly half of the dividends distributed go to the promoters and only about one-fifth to one-fourth goes to individual shareholders.Summing Up If promoters and intermediaries provide bulk of the risk capital. there have been very few such bids in India and even these turned out to be attempts at making quick money rather than genuinely seeking management control to improve the performance of the target company.

is it to attract foreign portfolio investments and help the enterprises in a roud about manner? Is it to provide profitable investment opportunities to individuals so that both individuals and enterprises benefit? If that is so. If for fear of losing control companies do not come to th market.the purpose of such listing to make promoters artificially wealthy. Chairman of the Joint Parliamentary Committee (JPC) that was constituted to look into the stock market scam of last year are worth quoting: “There are elaborate procedures which make decision-making slow. In spite of its other failures.” JPC is also reported to be unhappy with the Department of Company Affairs for the delay in action against a large number of chartered accountants identified by the earlier JPC set up to investigate the 1991-92 scam! Indeed. If disintermediation has to be meaningful. It should not be forgotten that the need for globalisation of capital markets arose from the interests of developed countries themselves. general meetings will be more of formal gatherings rather than having any effective voice. Who is now at the center-stage? Is the purpose of developing stock market to provide finance for enterprise? Or. The need for foreign capital by developing countries. Why should any company be ‘attracted’ to the stock market? It would come on its own if it needs public money. In the post-liberalisation period. The unfolding of events in US underlines the difficulties in regulating the stock market. came in handy for the developed ones. how can one hope to develop the stock market? The comments of Shri Prakash Mani Tripathi.would practically rest with the promoter group. there has been a conscious move to devolve decision-making authority from the government to company boards and shareholder meetings. They had also to find a secure retired life for their citizens. the situation is best summed by the Central Bureau of Investigation -. the minimum non-promoter shareholding should be reasonably large. It is anybody’s guess whether developing countries have the necessary openness. If investigations into scams take ages to conclude and essential infrastructure to monitor the market players remains underdeveloped and containment of insider trading remains only on paper. With the emphasis on attracting foreign portfolio investments. Choice of members of the board – whether ‘independent’ or otherwise -. Their banks were losing money in crises in Latin America. 1973 (FERA) stipulated a minimum of 60 per cent outside shareholding. generate business for the intermediaries and for the governments to feel happy about having achieved a fairly high degree of ‘stock market development’? If promoters of Infosys hold about 29 per cent and of Wipro 84 per cent respectively in the two companies. let them remain closely held.CBI (See Box). can the share prices of the two be compared at all? If with such high promoter shareholding Wipro stands at No 2 in the overall rankings of market capitalisation whom does such a valuation benefit? What is evolving is a sham market with all the trappings of a stock market. the Foreign Exchange Regulation Act. even if they do not know what to do with it beyond a limit. With such high promoter stakes. Joint sector ensured such shareholding at 49 per cnt. 17 . the minimum non-promoter shareholding should be much higher than 10 percent. firmness and genuine desire to seek truth and punish the guilty. The JPC feels that long drawn rules are aimed at delaying action. the very focus of stock market has been lost.

Criminal Intelligence Digest May 2001 FROM THE EDITOR'S DESK The scams by the financial institutions in India have been happening with a tedious regularity.nic. If. The investors are lured to part with their savings by promises of unrealistic returns. Otherwise. Are the inconsistencies and mis-categorisations noted by the authorities? If so. The modus operandi is fairly simple. a subsidiary of Crisil. The gullible public and the inefficient banking system provide ample opportunities for the financial institutions to play and squander the public funds. It is not as if that Indian accounting profession did not have any adverse disclosures earlier. no evidence to that effect.A. .110 003 http://cbi.in/cidmay01.K. While it is true that we would not have been able to get such information otherwise. in due course. Gupta Dy. everyone becomes a loser. a question arises what use the authorities are putting it to. Following the bursting into open of the accounting scandals in US. There is. Global Data Services. 87 companies had also understated profits in 2000-01 and 18 . the scams can often be nipped in the bud. remedial action should have been taken already. There is also a talk of creating an additional authority and curtail the role of the Institute of Chartered Accountants of India (ICAI). As the bubble bursts. arrest and prosecution deters them for sometime but in due course new scamsters and new scams emerge. There must be a mechanism to oversee their functioning.htm It is not enough to set up audit committees and other disclosures. The way the information is being provided by both large and small companies has significant ramifications for insider trading. Indian authorities are reported to be thinking of starting a random scrutiny of company annual reports for possible accounting manipulations. Breaking this vicious cycle is not difficult. The first one (Harshad Mehta led) was attributed to the systems failures and we are still debating the cause of the second collapse. the financial watchdogs play a pro-active role. nominate the latest villains. Investigation. It also appears that many companies are reluctant to provide the details of shareholders having more than one per cent holding in these companies. Further. If information filed remains in computer files (unlike earlier when they used to be confined to office files) and efforts are not made to collate them no purpose would be served by such information. The blame game is on and we shall. Special audits ordered by the BIFR came out with startling findings regarding auditors’ connivance with managements. the loss of money and faith. Director (Coordination) Central Bureau of Investigation (CBI) New Delhi . The over-heated stock market and the laxity of the financial institutions and the watchdogs like SEBI are the other major contributory factors. recently stated that while 139 out of a sample of 639 Indian companies overstated their profits. shocks and disbelief and of course. One thought that this was already being done. which is inevitable. The Parliament is already enquiring into the second major stock market meltdown in the last ten years. The banks and financial institutions are made to part with their funds either by misrepresentation or through forgery or by simply corrupting the bank officials. A case in point is the shareholding data which we had an opportunity to look at in some detail. The funds are placed at the disposal of scamsters who use these in the stock market operations. we will continue to traverse the cycles of scams and punishments. however.

The arguments of market regulation through share prices. Under or over statement of profits. these are the ones which are engaged to prepare consultancy reports for Indian companies and governments. some who kill the goose that lays golden eggs and some others who polish off the eggs and show to the outside world much smaller ones. in letter and in spirit. There are also the others who try to rear geese by imitating others even though they themselves do not have the faintest idea of how to go about it. These are the ones appointed as (dis)investment advisors. Where is the guarantee that the reports are not tailored to suit certain interests from the beginning and that information is not leaked out to the interested parties? For quite some time now a large section of the Indian financial press has been putting the government on the defensive. though important. Given the fact that one of the world’s top five accounting firms is involved in more than one scam should send shivers down the spine of many. The leading firms are also involved in tax havens. this aspect is hardly being talked about in India. For this one need not always have to reinvent the wheel or wait for some upheaval in developed countries.suggested that such practices are often linked to share price manipulation and issue of fresh equity to the public and the promoters. highlighted poorly drafted rules and guidelines. Here the main problem is not under or overstatement of profits alone but is how to plug siphoning-off funds by the promoters. The systems that are evolving in India are quite different from the developed country markets. Often they behave like PR outfits rather than a forum for unbiased analysis and presentation of facts. While the primary motive for professional managers for manipulating accounts would be to keep their jobs and increase their perks. for the business groups here it is a question of maximising benefits for the family. With the focus being on American corporate scandals. is undoubtedly different from siphoning-off. Stock markets cannot be there for serving the interests of a few. justify their fiduciary role. Things as they stand today are indicative of continuing family control over enterprises unlike US where professional managers are at the centre-stage. It has a much greater responsibility of informing the wider body of stakeholders of the fair and true status of affairs of an entity. policies and procedures. here it would be retaining control by the families. Audit is important not just from the point of protecting shareholders’ interest. they too are forced to give adequate space to the darker side of business and guide the investors properly. There is no point in blindly following their models. There are different types of promoters. The promoters should be made personally 19 . beyond a limit promoters who double up as managers do not care for other shareholders’ interests. The present approach unduly favours the promoters and needs to be discontinued forthwith. The experience of buybacks and mutual funds does point out to the problems in transplanting ideas without understanding the ground realities. Effective measures have to be put in place to prevent the managements from abusing their excessively high shareholding. Thanks to the developments in US. trading and corporate control are relevant for those seeking to do genuine business but not for those having ulterior motives. There is no escape from developing proper checks and balances and enforcing them strictly. After all. One hopes that they start taking a balanced view. Very few if it all. and the proliferation of companies which apparently do not have any genuine business objective and are meant essentially to subvert the system in one manner or the other. While in the former short-termism may be the rule. In the earlier issues of Alternative Economic Survey we ourselves brought out the types of nexus between promoters and auditors. Just as professional managers would seek to line their nests.

Ultimately. would it then really matter whether enterprises are financed by banks and financial institutions or by scattered individual investors or whether a company is in the public or the private sector? 20 . The minimum public offer should be placed considerably higher than the present 10 per cent. Access to the market must be related to genuine need for funds rather than to benefits flowing from limited public participation. they are capable of doing so and let institutions function without undue political inference. Obviously. In the face of increasing disclosures even SEC is asking for more and more funds to strengthen itself. would all these efforts ensure emergence of efficient enterprises? A billion dollar question is whether given all that they wanted. The massive deadwood has to be cleaned up. however. will the authorities in countries like India act with the sincerity. Until then. Authorities’ words should be translated into action instead of remaining paper promises to be repeated again when another scandal hits the market. Policing the corporates is a tough and massive task.responsible for omissions and commissions. If indeed. it is unwise to push the investors to the stock market by reducing the attractiveness of fixed income investment opportunities. commitment and alertness required for managing a genuine market. SEBI’s demands for more powers and staff would also receive sympathetic consideration.

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