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)
Of which, Private Placement (Rs. Crores)
Share of Private Placements in Total (%)
(2)
(3)
(4)
1990-91
14,219
4,244
29.85
1991-92
16,366
4,463
27.27
1992-93
23,286
1,635
7.02
1993-94
37,044
7,466
20.15
1994-95
41,974
11,174
26.62
1995-96
36,193
13,361
36.92
1996-97
33,872
15,066
44.48
1997-98
37,738
30,099
79.76
1998-99
59,044
49,679
84.14
1999-00
68,963
61,259
88.83
2000-01
73,922
67,500
91.31
(1)
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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On balance, 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. In the present context of financial liberalisation, 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. Thus, the coexistence of both systems is socially desirable not only because it encourages competition, but also because it reduces transaction costs within the financial system, and helps improve resource allocation within the economy. 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, Bank Deposits, Life Non-Bank UTI Units (Rs. Crores) Insurance, Deposits Debentures and Provident & Units of Mutual Pension Fund and Funds Claims on Government (1) (2) (3) (4) (5) (6) 1990-91 58,908 73.70 2.18 8.44 5.84 1991-92 68,045 62.01 3.26 9.99 13.35 1992-93 80,354 68.85 7.51 10.22 6.98 1993-94 1,09,618 64.79 10.63 9.18 4.29 1994-95 1,45,501 69.96 7.94 9.26 2.69 1995-96 1,24,338 68.98 10.61 7.11 0.21 1996-97 1,58,518 68.88 16.39 4.18 2.38 1997-98 1,71,740 86.14 3.92 2.60 0.35 1998-99 2,09,664 82.83 3.65 2.68 0.90 1999-00 2,44,143 82.97 2.60 5.61 0.74 2000-01 2,64,699 87.87 3.39 3.24 -0.51 Source: Reserve Bank of India. Note: @ Other investments are not shown here. Hence percentages in Cols. (3) to (6) do not add up to 100.
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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 1,040 1,133 1,678 1,670 842 102 48 79 145 15
Of which, Ordinary Shares Amount Number Amount Share Premium (Rs. Cr.) of Issues (Rs. Cr.) included in (5) (3) 4,312.2 5,756.8 19,803.4 19,330.3 26,416.7 16,117.5 10,424.1 3,138.3 5,013.1 5,153.3 4,948.9 3,964.5
(4) (5) 246 1,284.3 368 1,731.3 868 9,952.6 983 9,959.7 1,548 17,414.4 1,598 11,997.3 805 6,116.0 89 1,162.4 33 2,562.7 69 2,752.5 134 2,666.5 5 859.5
(6) 127.9 227.5 5,184.1 4,464.9 8,430.8 4,856.4 1,462.1 653.5 1,325.8 2,169.3 1,267.3 N.A.
Ratio of (5) to Assistance Disbursed by Financial Institutions (%) (7) 33.66 38.09 85.54 72.60 78.70 41.39 24.40 5.85 8.59 7.51 6.86 N.A.
Source: Col. (1) to (6) are based on RBI data and Col. (7) on NSE, Indian Stock Market: A Review, Vol. IV, 2001. N.A. =Not Available.
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 i)
Capital Market (Debentures + Paid-up Capital) ii) Financial Intermediaries (Banks and FIs) Source: Reserve Bank of India.
1985-86 to 1989-90 2
1990-91 to 1994-95 3
1995-96 to 1999-2000 4
18.2
26.0
19.0
22.2
18.5
20.2
Hasty Liberalisation? The decision to increase the role of stock market was taken, as a part of the ‘shock therapy’, without adequate preparation or understanding of the behaviour of the financial sector and of the major players -- intermediaries, promoters, investors and the regulators – in a country like India, and even ignoring the experience of the 1980s when initially the stock market was given a major push. The gates were thrown wide open as it were. Result: a series of scams of varying gravity with the regulators getting the blame for inexperience, laxity and lacking in proactive approach. Instead of trying to address the problems, those in authority often sought to shift the responsibility onto one another. Investigations have been long drawn and even when actions were taken, they were turned down by the appellate authority. There are comments galore at the serious problems of insider-trading and price manipulations. The first major scam was perpetrated by Harshad Mehta. 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
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Sensitive Index (Sensex) more than doubled from about 2,000 to 4,400. This gave rise to a false impression of the windfall gains that could be had from the stock market and created a `herd’ mentality. During the boom period, shares of even loss-making companies commanded high premium. Another major scandal of the initial period was the promoters, especially MNCs, issuing themselves preferential shares at prices far lower than the then prevailing market prices. Apart from the doubtful quality of many of the new issues, an important case which shook the markets in early 1995 was the Rs. 350 crore Fully Convertible Debentures (FCD) issue of M.S. Shoes. The company was accused of inadequate disclosures. Taking advantage of free pricing of issues, many companies charged high premium. But the post-listing returns proved to be disappointing. In the postliberalisation period a good number of companies were not only non-manufacturing ones, but the purpose of issue also varied from project finance to working capital. In terms of numbers, about one-third of the issues were by financial companies with a preponderance of non-banking financial companies (NBFCs). A number of public issues were made without any critical scrutiny. The Reliance share switching scandal, gross disappointment with Morgan Stanley’s Mutual Fund issue, 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. Primary market scam of the mid-1990s, an important one in this sequence, 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. In addition, communal disturbances -- the latest being the Gujarat carnage, war fears, East Asian financial crisis, sanctions following nuclear tests, UTI’s US-64 troubles, etc. further contributed to the difficulties by periodically depressing the market. 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, the National Stock Exchange (NSE) concluded that the households lacked “experience of stock market operations”. 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. 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. This enabled many non-serious and fraudulent promoters to take advantage of the policy vacuum. Obviously, the experience proved quite costly both for the investors and the economy. Of late, newspapers have been projecting revival of the primary market with a number of IPOs during the second half of this year. Tata Consultancy Services (TCS) is expected to lead the pack and raise between Rs. 4,000-5,000 crores. Enthusiasm is being whipped up by the financial press to attract the individual investor back to the market. Apart from many other questions, some of which we shall address a little later, given the kind of shocks the Indian stock market is prone, 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, communal, defence, terrorism – national and international – factors. The public issues that are in the pipeline would definitely seek a high premium. Given the circumstances of India, who can guarantee that there won’t be another scam or a major adverse event 5
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. 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. Such phenomenon is more prevalent in profit-making companies. Within the profit-making companies those who increased their borrowings invested relatively more than the rest. There is growing importance of group companies and non-marketable securities as also advances to group companies in such outside investments. The average returns from such investments, were, however, lower than the average interest rate paid out by the companies. The main purpose of the investments, therefore, appears to be acquiring/retaining/strengthening control over other (as also group) companies rather than getting better financial returns from such investments. Once loans and investments are made, directors and shareholders of the investing company would have no further control over the utilisation of funds. 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. 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. 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, which were relaxed in the new regime, may be tightened again to prevent misuse of subsidiaries and other companies to route funds into the stock market. Disintermediation? The basic purpose of stock market is to provide capital for investment and for the investors liquidity. The need for such capital is expected to increases with size of the enterprise. For large companies to emerge and function effectively, there is a need to pool risk capital which individual entrepreneurs cannot bring in on their own or with the help of relatives, friends and acquaintances. What is the position that is emerging now? Who own listed companies or, alternatively who provide the risk capital: promoters, intermediaries (broadly defined to include a variety of financial institutions), 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, in the new regime, a few factors are expected to influence the shareholding pattern. (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, especially to foreign companies, following liberalisation of the economy. In a tacit recognition of this fact, promoters have been allowed to increase their stakes gradually without the obligation of making an open offer to the other shareholders.
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(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. In a typical takeover case, due to open offer, controlling interests’ stake increases because on top of the shareholding acquired from the existing promoters, the new promoters would have to make an open offer to the remaining shareholders. With the relaxation of limits on foreign direct investment (FDI) in individual enterprises, listed affiliates of foreign companies tended to acquire subsidiary status. Some of them have either got already delisted or are on the verge of delisting. It was initially felt that the foreign institutional investors (FIIs) could connive with foreign companies in taking over Indian companies. Possibly due to such a perception, ceilings were introduced on overall and individual FII shareholdings. The limits have been, however, increased progressively. While there is a general ceiling of 24 per cent, in individual cases companies can decide to raise the limit up to 49 per cent. Early this year, sectoral caps for FDI have been made the limits for FII investments as well. Limits on inter-corporate investments have been liberalised thereby enabling companies engage in a variety of inter-corporate relationships, the simplest being cross-holding of shares. Crossholding obviates the need to mobilise additional resources by the managements for strengthening control. A conscious effort also has been made to promote mutual funds, following again the US model that individual investors do not have the time, knowledge and resources to make right investment choices on the stock markets. Expert analysts of these funds are expected to take informed investment decisions. Convertibility clause whereby term lending institutions had the option to convert certain portion of their loans into equity has been withdrawn. As per the official guidelines, non-promoter shareholding can be as low as 10 per cent. The ceiling was earlier 25 per cent.
Given these changes, it would be relevant to examine the present shareholding pattern of listed companies. 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, Mumbai (BSE) which has a large number of companies listed, are presented in the following. While the shareholding data was collected from the BSE Website, other relevant data has been put together from different sources. 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. This is measured as the product of number of shares multiplied by the 7
prevailing market price summed for all the listed companies. According to one estimate, market capitalisation (MCAP) of listed companies on April 11, 2002 was Rs. 6,36,045 crores. The MCAP of 2,574 companies for which we could get the latest shareholding data was Rs. 6,11,794 crores. 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. The shareholding data refers in nearly 90 per cent of the cases to March 2002, and in the remaining to December 2001. Leaving aside the 67 listed public enterprises, in which the government would in any case have a majority shareholding, market capitalisation of 2,507 nongovernment listed companies for which shareholding data was available was Rs. 4,40,246 crores. 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. 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, individual shareholders and NRI/OCBs. In one case, the address of a ‘non-promoter’ corporate shareholder was that of the company’s Chairman himself! Interestingly, a few large companies did not claim that there were any promoters (e.g. ACC, BSES and ITC). In some of the extreme and large cases we tried to reclassify the shareholdings of controlling interests appearing in other categories. The exercise could not be conducted for all the companies due to limitations of time as also lack of detailed information. If such holdings are also taken into account it is likely that overall share of the promoters may well exceed half. Promoters indeed are likely to keep certain of their entities out of the ambit for a number of reasons. Apart from narrowing the scope of insider trading investigations, one rationale could be that they would not gain anything by claiming an investor to be associated with the promoter. In some circumstances, fights within controlling families could be responsible for not naming certain entities as promoter shareholdings. 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. Keeping certain shareholdings out of the promoter group also helps to ward off the threat of delisting. Table–V Share of different Categories of Shareholders in Market Capitalisation Category
Market Capitalisation (Rs. Crores)
(1)
(2)
A
Total Market Capitalisation (MCAP)#
6,36,045
B
Of which, MCAP of 2,574 companies for which shareholding data is available $ MCAP of 67 public enterprises (within B)
1,71,634
C D
Share in Market Capitalisation of nongovernment companies (%) (3)
6,11,794
MCAP of 2,507 Non-Government Companies (B) - (C) Composition of (D) 1) Indian and Foreign Promoters including persons acting in concert with them 2) Institutional Investors
4,40,160
100.00
2,10,597
47.85
1,08,281
24.60
(a) Foreign Institutional Investors (FIIs)
53,741
12.21
(b) Banks & Financial Institutions
30,506
6.93
(c) Mutual Funds
24,033
5.46
8
3) General Public: Indian
79,086
17.97
4) Private Corporate bodies
17,582
3.99
5) Non-Resident Indians and Overseas Corporate Bodies (OCBs) controlled by them 6) Others (including GDRs)
6,997
1.59
17,617
4.00
# As per data accessed from www.capitalmarket.com on April 12, 2002. $ MCAP was available for 2,055 companies.
In terms of numbers also, in roughly half of the companies, promoters have a majority stake. The incidence of majority promoter ownership is more prevalent in case of large companies with more than Rs. 50 crores market capitalisation (TableVI). Promoter’s stake, however, need not always be held by the promoters themselves in their personal capacity. It could be provided by other companies controlled by the group, some of which could be listed companies themselves. Such investments while lessening the risk borne by the promoters enable them exercise disproportionately greater control over the companies involved. The available data does not facilitate a comprehensive examination of this phenomenon. A limited analysis of the shareholding pattern of Tata House companies reveals that in a majority of the cases, investments by other listed companies of the group and their subsidiaries contributed significantly to the promoters’ stake. If the investments of listed companies of the group in Tata Sons and Tata Industries, which in turn hold stakes in many of the group’s listed companies, are also taken into account, the group’s strategy of using listed companies’ money to bolster its control becomes quite evident. At the end of 2000-01, the total cost of acquisition of shares in the two apex companies by some of these listed companies was more than Rs. 400 crores. Interestingly, while TELCO holds 4.68 per cent of equity of TISCO, TISCO in turn holds 9.37 per cent of TELCO’s equity. The recent attempt by the group at making VSNL invest in Tata Teleservices should not, therefore, surprise anyone. Table-VI Distribution of Companies according Promoters’ Stake Promoters’ Shareholding (%)
All Companies
(1) Less than 10 10 – 25 25-40 40 and up to 50 More than 50 and up to 74 More than 74 Total
No of Companies (2) 86 197 539 439
Per cent to Total (3) 3.43 7.86 21.50 17.51
952 294 2,507
37.97 11.73 100.00
Companies having Rs. 50 crore or more of MCAP No of Companies Per cent to Total (4) 13 24 94 65
(5) 2.76 5.10 19.96 13.80
202 73 471
42.89 15.50 100.00
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
9
Market Capitalisation (Rs. Cr.) Total
Average (4)/(3)
(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 2,507
(3) 170 642 642 273 271 544 1,998
(4) 5,646.90 50,020.57 18,272.79 3,150.97 1,994.57 5,145.54 79,085.80
(5) 33.22 77.91 28.46 11.54 7.36 9.46) 39.58
There are 1,761 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 the remaining 746 companies the share of public was 40 per cent or more. In the context of disintermediation this is an extremely relevant group and hence needs a closer look. Significant direct shareholding of the public is thus limited to just about 30 per cent of the cases only. An important feature of this group is that, going by the market capitalisation of the companies for which MCAP is available, 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. While no trading took place in 139 cases, if the ones traded on less than 25 days (i.e., less than one-tenth of the total number of days traded) are also taken into account, in close to half of the cases, there is very little trading (Table-VIII). In contrast, companies with less than 40 per cent public shareholding fared somewhat better. That the trading that had taken place in the 746 companies could be nominal is evident from Table-VIII. In a little less than half of the cases, there was nil trading or the total number of trades were fewer than 62 i.e., less than 1 trade in four days. In two-thirds of the cases, the average trades per day were two or less. Once again, companies with lower share of outside individual investors were somewhat in a better position. Thus, while there is lack of liquidity in general, for the companies having relatively larger pubic shareholding, it is even worse. 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. of days traded
(1)
40 per cent or more Less than 40 per cent Cumulative Per Cumulative Per No. of Cos. cent No. of Cos. cent (2)
(3)
(4)
(5)
Not Traded at all
139
18.63
262
14.88
Less than 25 days
215
47.45
327
33.45
25 – 50 days
54
54.69
114
39.92
50 – 100 days
71
64.21
168
49.46
100 – 150 days
63
72.65
160
58.55
204
100.00
730
100.00
More than 150 days
All Companies 746 Note: Total number of trading days – 247.
1761
10
Table-IX Distribution of companies according to number of trades and the Extent of shareholding by the Indian Public No. of Trades in 247 days
(1)
Companies with shareholding of General Indian Public 40 per cent or more No. of Cos. Cumulative Per cent (2) (3)
Less than 40 per cent No. of Cos. Cumulative Per cent (4) (5)
0
139
18.63
262
14.88
<62
33.73
225
48.79
332
62-125
39
54.02
85
38.56
125 - 250
43
59.79
106
44.58
250 - 500
51
66.62
125
51.68
500 - 1000
55
73.99
150
60.19
1000 - 2500
53
81.10
179
70.36
2500 –5000
40
86.46
134
77.97
5000 +
101
100.00
388
100.00
All Companies
746
1,761
It thus appears that the individual investors are stuck in companies whose shares are hardly traded. They cannot get out even if they wish to because there are no takers. 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. 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). Within this, FIIs are the most important category followed by banks and financial institutions and mutual funds (MFs). Out of the 2,574 companies, FIIs had a presence in 633 companies (Table-X). However, in as many as 340 cases FII holdings were less than 1 per cent of the total shareholding of the respective companies. Given the possibility that some of the FII investments could as well be Indian money coming back, the actual number of companies with ‘real’ FII investment could be even less. In only 9 cases FII holding was above 24 per cent -- the main ceiling. The 10-24 per cent group is the most important one in terms of market value of investment, followed by the 24-40 per cent group. Among the companies under study, HDFC is the only company having more than 40 per cent FII shareholding. It is interesting to note that Hindustan Lever got shareholders’ approval for 49 per cent FII equity. Assuming that FIIs will take up all that equity and Hindustan Lever being a foreign subsidiary with 51 per cent foreign shareholding, nothing will be left for the Indian shareholders, 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. 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. 63,191 crores, or roughly US$ 12.8 billion according to the present exchange rate, owned by FIIs, top 10 companies account for as much as 61.73 per cent and the top 25 account for over 85 per cent (Table-XI). Interestingly, Sensex (30) companies account
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for about three-fourths of FII investments and NSE Nifty (50) companies account for nearly 90 per cent of their investments. This may indicate how FII trading could affect the two most popular stock exchange indices. Thus if the objective is to attract FII investments, only a few listed companies are relevant and the ceilings on FII investments are irrelevant in an overwhelming number of cases. Table - 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
(1) 0–1 1–2 2-5 5 – 10 10 – 24 24 – 40 40 + All# Nil
(2) 340 56 106 58 64 8 1 633 1,941
Market Value of FII Investments Amount Per cent to Total (Rs. Cr.) (4) (5) 259 0.41 382 0.60 3,121 4.94 2,633 4.17 36,297 57.44 16,847 26.66 3,652 5.78 63,191 100.00
(3) 53.71 8.85 16.75 9.16 10.11 1.26 0.16 100.00
# Including 20 companies for which market capitalisation is not available.
Note: PSEs which were left out of the earlier tables are taken into account here.
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. Next important category of institutional investors is that of mutual funds (including UTI), which are looked upon to mitigate the problems of small investors. Even if all the investment held by MFs is credited to the Indian public, share of the public would be less than one-fourth of the total. However, certain questions arise regarding the investments of MFs. It is not necessary that not all the unit holders are individuals and not all the funds with MFs are invested in equity shares. A quick estimate suggests that at the end of May 2002, equities accounted for a little less than 30 per cent of the total net assets of a about Rs. 1 lakh crores assets of the MFs. Bulk of the investment is in the form of debt. While MF investments are in about 1,400 companies, 100 top companies account for over 90 per cent of the total investment. Table-XI Share of Top companies# in Market Value of FII Investments@ Category
Market Capitalisation (Rs. Cr.) (2) 39,010 54,125 60,258 62,400 63,191 47,757 51,310 56,772 2,417
(1) Top 10 Top 25 Top 50 Top 100 Total for 633 Companies Sensex 30 BSE 100 Nifty (50) Nifty Junior (50)
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Per cent to Total (3) 61.73 85.65 95.36 98.75 100.00 75.58 81.20 89.84 3.82
Nifty + Nifty Junior (100)
59,199
93.68
@ As in Table-X, PSE are included here. # In terms of value of FII investments.
It is a fact that apart from individuals many large companies and banks invest in MFs. Investments during 2000-01 in MF units (including UTI) by 4,752 companies and banks covered in the Prowess corporate database of CMIE worked out to almost 16,700 crores. Though direct comparisons are not appropriate, this amount is equivalent to about two-thirds of total value of MF investments covered in Table-V. The amount covered in Table-V is also very close to the share of equity in net assets of MFs arrived by us. In a sense, quite a high proportion of MFs’ assets belong to companies themselves. For instance, Hindustan Lever Ltd (HLL) invested close to Rs.400 crores in MFs at the end of 2001 while MFs’ investments in HLL are valued at Rs. 1,674 crores. In a few MF schemes, just one or two investors accounted for an overwhelming part of the net assets of the respective scheme. 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, Grasim Inds, HCL Technologies, HDFC Ltd, Hero Honda Motors Ltd, Hindalco Inds Ltd, ICICI Ltd, ITC Ltd, Tata Power Ltd, etc. Incidentally, Bharti went public towards the end of January 2002 and raised about Rs. 834 crores. Practically all of its portfolio of MF investments was acquired during 2001-02. It is said that while during 2001-02 MFs mobilised Rs. 1,64,523 crores, the redemptions were as much as Rs. 1,57,347.97 crores. 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, 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. Evidence indeed points to the dominant role played by large companies in MF transactions. For instance, te total purchases and sales of MF units by Tara Power Co. Ltd. During 2001-02 were about Rs. 8,900 crores. Correspomding figures for Bharti Televentures, Hero Honda Motors and ITC were about Rs. 6,000 crores, Rs. 4,500 crores and Rs. 3,000 crores respectively. Face value of Grasim’s dealings were nearly Rs. 900 crores. Interestingly, Hindalco dealt with more than 175 crores units, a significant proportion of which being that of the group’s MF. Another observation regarding MFs is that most schemes invest in only a few companies. Often, the lists of such companies overlap. An important factor is that while there are 37 MFs (including UTI), the ones who really matter (in terms of net assets) are about half of the total. On the other hand the MFs operate about 600 schemes, outnumbering the active scrips, making it difficult for the small investor to choose the best and appropriate one. Indeed as NSE put it : “…proliferation of number of MFs and their schemes has made investors as bewildered as they are with securities. The investor likes choice, but he is lost with too many choices”. A few points need to be considered here: (i) MFs’ involvement takes away the real essence of raising resources directly from investors; (ii) given their functioning, MFs may not be the right choice to mitigate the problems of small investors; (iii) the involvement of MFs and other institutional investors may in fact be adversely affecting the liquidity of many companies; and (iv) there seems to be a degree of cross circulation of funds between companies and mutual funds, thereby creating a situation of money chasing money.
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Private Corporate Bodies From Table-V it was seen that companies other than the ones included under promoters and persons acting in concert, account for 3.99 per cent of MCAP. Apart from FIIs, it should be expected that threat to incumbent managements would come mainly in the form of corporate bodies. In most cases, shareholding of other corporate bodies is quite low (See Table-XII). What is more relevant, however, is that, as noted earlier, in quite a few cases the relationship of these companies with the promoter groups is obvious. For instance, in Ambalal Sarabhai Enterprises (ASE), the 14.78 per cent holding of Sarabhai Piramal Pharmaceuticals Pvt Ltd (SPP) is shown as non-promoter holding. Both ASE and Nicholas Piramal hold 2,25,00,250 shares of Rs. 10 each of SPP. SPP, could thus be a 50:50 joint venture of the two companies. It would be illogical to expect that SPP would not support the promoter group. The two non-promoter corporate bodies reported in case of Blow Plast also could be traced to Piramals. It does appear that wherever shareholding of private corporate bodies is large, the possibility of such companies being related to promoters is quite high. One also finds many investment and trading companies among the private corporate bodies category. Some of these have their registered offices at places where a number of such companies have been registered over the years. This indicates the possibility of channeling black money into the stock market and/or the companies being used by stock brokers. 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. of Companies (2) 809 621 447 480 217 2,574
Market Trading Table-XIII shows a tremendous growth in market turnover and market capitalisation of listed companies during the post-liberalisation period. The figures, however, suffered a major set back during 2001-02 as a result of the exposure of scam allegedly involving Ketan Parekh, Tehelka exposures, September 11 terrorist attack in the US, December 13 attack on Indian Parliament, war threat and the communal holocaust in Gujarat. 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) 36,012 N.A. 71,777 N.A. 45,696 84,536 2,03,705
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(Amount in Rs. Cr) All-India Market Capitalisation (5) 1,10,279 3,54,106 2,28,780 4,00,077
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
1,805 67,287 2,95,403 3,70,193 4,14,474 8,39,052 13,39,510 5,13,167
67,749 50,064 1,24,284 2,07,644 3,11,999 6,85,028 10,00,032 3,07,292
1,64,057 2,27,368 6,46,116 9,08,691 10,23,681 20,67,031 28,80,990 N.A
4,73,349 5,72,257 4,88,332 5,89,816 5,74,064 11,92,630 7,68,863 N.A.
DN= Did not exist. NA=Not Available
This overall growth, however, has been accompanied by heavy concentration in a few companies and sectors. While 5,782 companies were listed at BSE at the end of March 2002, only 3,223 were traded any time during 2001-02 i.e., 2,559 companies (44 per cent of total) were not traded at all during the year. Even among the 3,223, quite a few were traded infrequently. In addition, about 1,400 companies (24 per cent of total) were traded on less than 50 days during 2001-02. Interestingly, the low level of trading in many of the scrips is accompanied by large volumes. Indeed, there is excessive concentration in trading. For instance, at the NSE, top 50 companies account for nearly 92 per cent of the total turnover. The volumes were driven by the so-called new economy stocks in 1999-00 to an all time high. And these continued to be the market favourites in 2001-02 as well. 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. Sectoral concentration is evident from the fact that out of the top 50 companies, those in information technology accounted for as much as 67 per cent of the market turnover. Thus even in the unlikely situation of there being no other IT company in the remaining ones, the share of IT sector would be at least 61 per cent of the total. The lopsided emphasis on these stocks has been created and sustained by the institutional investors and has also been manipulated by scamsters. The insignificant trading in many scrips indicates the possibility of many duds being listed at BSE. Out of the 5,688 companies for which stock transaction details are reported in the Stock Reach pages of BSE and collected on 3rd and 24th June 2002, it becomes evident that as many as 2,415 were suspended from trading and 2,535 were placed under the ‘Z’ group (of companies not complying with certain listing requirements). In all, 3,399 companies were either suspended or were placed under ‘Z’ group. In many of the cases trading was only nominal. From the BSE website it has also been noticed that while 629 companies were delisted, 482 of these were delisted because of non-payment of listing fees. 571 companies, which have already been suspended from trading have been placed by BSE under the ‘Unknown category’ as of 15 June, 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", "shifted" etc. This number is quite large compared to the 229 “vanishing companies” reported recently by the Ministry of Law Justice & Company Affairs. In any case, as far as the investor is concerned, 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. A good number of these may well be existing only on paper with virtually no activity. A cursory look at the quarterly results does suggest such a possibility.
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Summing Up If promoters and intermediaries provide bulk of the risk capital, and individuals have very little stakes, a question arises about the disintermediary role of the stock market. A related issue is based on the experience of US and UK, the models India and other developing countries are seeking to adopt. These are based on the assumption that there is a complete division between managers and shareholders, the real owners of enterprises. Since the managers cannot be trusted to put the investors’ money to best use and in the long term interest of the enterprise, the market is expected to monitor and discipline them. The shareholding pattern witnessed above is hardly conducive for the market to play its role. Given such high promoter stakes, hostile takeover bids are unlikely to succeed. In fact, 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. Following Cadbury Committee’s recommendations and the East Asian financial crisis, the issue of corporate governance has occupied centre-stage. It has now become a paying proposition for many to talk of the issue. In India, interestingly, 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. It is not as if Indian policy makers were ignorant of the need to regulate managements. 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. Auditors on their part had to disclose the reasonableness of transactions with related parties. There were limits on managerial remuneration and inter-corporate investment and loans. 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. In practice, these were, however, nullified due to poorly drafted rules, weak definitions, political interference and outright negligence and corruption. For instance, great falsehood is being perpetrated in defining ‘companies under the same management’ under the Companies Act. In spite of these limitations, analysts pointed out how involvement of nominee directors improved company boards’ functioning. What gets distributed as dividends is relatively a small amount. Given the shareholding pattern, nearly half of the dividends distributed go to the promoters and only about one-fifth to one-fourth goes to individual shareholders. That leaves capital appreciation as the main attraction of the stock market. Capital appreciation in crude terms, however, is nothing but one investor who thinks that he can get a better deal from yet another investor giving it to another investor. One cannot get help drawing similarities between lottery and the stock market. In a lottery, the few winners get a part of the money put in by all other purchasers of that lottery’s tickets. The one who is running the lottery doesn’t give away anything. If promoter shareholding can be as high as 90 per cent, the listed companies will be no better than lottery counters. There is no question of the general public benefiting from the fruits of enterprise. On the other hand, there is no question of the enterprise getting constrained due to lack of funds if it had not got listed. The premium that such a company charges while making the public offer would be more often than not unjustified. 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
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the purpose of such listing to make promoters artificially wealthy, 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, 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. Who is now at the center-stage? Is the purpose of developing stock market to provide finance for enterprise? Or, 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, the minimum non-promoter shareholding should be much higher than 10 percent. In spite of its other failures, the Foreign Exchange Regulation Act, 1973 (FERA) stipulated a minimum of 60 per cent outside shareholding. Joint sector ensured such shareholding at 49 per cnt. If for fear of losing control companies do not come to th market, let them remain closely held. If disintermediation has to be meaningful, the minimum non-promoter shareholding should be reasonably large. 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, there has been a conscious move to devolve decision-making authority from the government to company boards and shareholder meetings. With such high promoter stakes, general meetings will be more of formal gatherings rather than having any effective voice. Choice of members of the board – whether ‘independent’ or otherwise -- would practically rest with the promoter group. It should not be forgotten that the need for globalisation of capital markets arose from the interests of developed countries themselves. Their banks were losing money in crises in Latin America. They had also to find a secure retired life for their citizens. The need for foreign capital by developing countries, even if they do not know what to do with it beyond a limit, came in handy for the developed ones. With the emphasis on attracting foreign portfolio investments, the very focus of stock market has been lost. The unfolding of events in US underlines the difficulties in regulating the stock market. It is anybody’s guess whether developing countries have the necessary openness, firmness and genuine desire to seek truth and punish the guilty. 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, how can one hope to develop the stock market? The comments of Shri Prakash Mani Tripathi, 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. The JPC feels that long drawn rules are aimed at delaying action.” 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, the situation is best summed by the Central Bureau of Investigation -- CBI (See Box).
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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. The Parliament is already enquiring into the second major stock market meltdown in the last ten years. The first one (Harshad Mehta led) was attributed to the systems failures and we are still debating the cause of the second collapse. The blame game is on and we shall, in due course, nominate the latest villains. The gullible public and the inefficient banking system provide ample opportunities for the financial institutions to play and squander the public funds. The over-heated stock market and the laxity of the financial institutions and the watchdogs like SEBI are the other major contributory factors. The modus operandi is fairly simple. The investors are lured to part with their savings by promises of unrealistic returns. 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. The funds are placed at the disposal of scamsters who use these in the stock market operations. As the bubble bursts, which is inevitable, everyone becomes a loser. Investigation, arrest and prosecution deters them for sometime but in due course new scamsters and new scams emerge. Breaking this vicious cycle is not difficult. If, the financial watchdogs play a pro-active role, the scams can often be nipped in the bud. Otherwise, we will continue to traverse the cycles of scams and punishments, shocks and disbelief and of course, the loss of money and faith.
- A.K. Gupta Dy. Director (Coordination) Central Bureau of Investigation (CBI) New Delhi - 110 003 http://cbi.nic.in/cidmay01.htm It is not enough to set up audit committees and other disclosures. There must be a mechanism to oversee their functioning. 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. A case in point is the shareholding data which we had an opportunity to look at in some detail. While it is true that we would not have been able to get such information otherwise, a question arises what use the authorities are putting it to. The way the information is being provided by both large and small companies has significant ramifications for insider trading. It also appears that many companies are reluctant to provide the details of shareholders having more than one per cent holding in these companies. Are the inconsistencies and mis-categorisations noted by the authorities? If so, remedial action should have been taken already. There is, however, no evidence to that effect. Following the bursting into open of the accounting scandals in US, Indian authorities are reported to be thinking of starting a random scrutiny of company annual reports for possible accounting manipulations. One thought that this was already being done. There is also a talk of creating an additional authority and curtail the role of the Institute of Chartered Accountants of India (ICAI). It is not as if that Indian accounting profession did not have any adverse disclosures earlier. Special audits ordered by the BIFR came out with startling findings regarding auditors’ connivance with managements. Further, Global Data Services, a subsidiary of Crisil, recently stated that while 139 out of a sample of 639 Indian companies overstated their profits, 87 companies had also understated profits in 2000-01 and
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suggested that such practices are often linked to share price manipulation and issue of fresh equity to the public and the promoters. In the earlier issues of Alternative Economic Survey we ourselves brought out the types of nexus between promoters and auditors, highlighted poorly drafted rules and guidelines, 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. Audit is important not just from the point of protecting shareholders’ interest. It has a much greater responsibility of informing the wider body of stakeholders of the fair and true status of affairs of an entity. 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. After all, these are the ones which are engaged to prepare consultancy reports for Indian companies and governments. 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. Often they behave like PR outfits rather than a forum for unbiased analysis and presentation of facts. Thanks to the developments in US, they too are forced to give adequate space to the darker side of business and guide the investors properly. One hopes that they start taking a balanced view. The systems that are evolving in India are quite different from the developed country markets. There is no point in blindly following their models, policies and procedures. The experience of buybacks and mutual funds does point out to the problems in transplanting ideas without understanding the ground realities. Things as they stand today are indicative of continuing family control over enterprises unlike US where professional managers are at the centre-stage. 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. While in the former short-termism may be the rule, here it would be retaining control by the families. Just as professional managers would seek to line their nests, beyond a limit promoters who double up as managers do not care for other shareholders’ interests. Here the main problem is not under or overstatement of profits alone but is how to plug siphoning-off funds by the promoters. Under or over statement of profits, though important, is undoubtedly different from siphoning-off. With the focus being on American corporate scandals, this aspect is hardly being talked about in India. There are different types of promoters; 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. 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. Very few if it all, justify their fiduciary role, in letter and in spirit. The arguments of market regulation through share prices, 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. For this one need not always have to reinvent the wheel or wait for some upheaval in developed countries. Stock markets cannot be there for serving the interests of a few. The present approach unduly favours the promoters and needs to be discontinued forthwith. Effective measures have to be put in place to prevent the managements from abusing their excessively high shareholding. The promoters should be made personally 19
responsible for omissions and commissions. Access to the market must be related to genuine need for funds rather than to benefits flowing from limited public participation. The minimum public offer should be placed considerably higher than the present 10 per cent. The massive deadwood has to be cleaned up. Authorities’ words should be translated into action instead of remaining paper promises to be repeated again when another scandal hits the market. Until then, it is unwise to push the investors to the stock market by reducing the attractiveness of fixed income investment opportunities. Policing the corporates is a tough and massive task. In the face of increasing disclosures even SEC is asking for more and more funds to strengthen itself. Obviously, SEBI’s demands for more powers and staff would also receive sympathetic consideration. Ultimately, however, would all these efforts ensure emergence of efficient enterprises? A billion dollar question is whether given all that they wanted, will the authorities in countries like India act with the sincerity, commitment and alertness required for managing a genuine market. If indeed, they are capable of doing so and let institutions function without undue political inference, 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?
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