Big Surge in Number of Shareholders in PSUs
(This is for information and educational purposes only. This should not be
construed as a recommendation or investment advice even though the author is a CFA
Charterholder. Please consult your financial adviser before taking any
investment decision. Safe to assume the author has a vested interest in stocks
/ investments discussed if any.)
In the past four years, that is, between end of March2020 and end of March2024, the number of demat accounts in India rose by almost 11 crore, showing an absolute growth of almost 270 per cent in four years or annualised growth rate of 38.5 per cent.
India has never experienced such a growth in number of demat accounts before.
The outbreak of COVID-19 Pandemic in Mar2020 was a turning point for retail investor interest in the Indian stock market. They have since been flocking in
droves to stock market.
1. Growth of retail investors
When retail and small investors are piling into stocks, it is generally not a good sign for future stock prices. It is not that institutional investors are smarter than retail investors.
Institutional investors both in India and abroad, like, sovereign wealth funds, endowments, foundations, foreign portfolio investors (FPIs), domestic institutional investors (DIIs), insurance companies and pension funds tend to hold stocks for the long term as they do not have any immediate obligations to encash their holdings.
For example, a pension fund named Employee Provident Fund Organisation (EPFO) has steadily increased their investments in Indian stocks over several years and they tend to hold them for long periods of time.
Retail investors, in recent years, have been trading heavily in riskier derivatives segment of the market. India's capital market regulator in a study last year observed that almost 90 per cent of individual traders in equity derivatives segment incurred losses during the study period.
The time-frame of retail investors is much shorter and as such they tend to exit a stock at the first sign of selling or trouble or panic.
This is exactly what happened to PSU stocks on 04Jun2024, the day when results of India's Parliamentary polls were announced and the poll outcome was against the market expectations.
A
large number of retail investors have thronged the PSU stocks,
railway stocks, defense stocks and stocks belonging to power, capital goods and
infrastructure sectors in the recent past lifting their share prices enormously.
2. Steep fall in PSU stocks on a single day
PSU stocks are public sector undertakings owned by Government of India. As per the Companies Act, 2013, a government company is a company where the shareholding of Central government and / or State government is not less than 51 per cent of the total.
Many PSU stocks on 04Jun2024 suffered steep losses of between 10 and 25 per cent. Yes, the stocks suffered single-day loss of up to 25 per cent, which indicates the degree of market euphoria and subsequent disappointment towards these stocks.
How PSU stocks fared on 04Jun2024?
Here is a list of PSU stocks that had suffered the most on 04Jun2024:
Exhibit showing list of 20 PSU stocks with number of shareholders for the past four years:
The above list is in the order of percentage fall from biggest fall to lowest fall on 04Jun2024.
The 20 PSU stocks shown in the above exhibit suffered losses of between 15 and 20 per cent in a single day when the results of India’s
parliamentary polls were announced.
The top loser in the list was REC Ltd stock which suffered a loss of 25 per cent (however, it must be noted the stock provided a spectacular one-year return of 280 per cent prior to the fall).
The least loser in the list was Punjab & Sind Bank stock which declined by 15 per cent (the stock's one-year return was 85 per cent prior to the fall -- the single-day loss percentages are given at the end of the blog).
Due to a combination of re-rating, better results, large money flows and general market optimism, the shareholders have been enjoying amazing returns in most of the PSU stocks in the past one to two years.
The momentum in these stocks attracted a large number of retail shareholders to these stocks.
The details of 'public' shareholding in the stocks is shown in the above exhibit. Public shareholding, for the purpose of this blog, is the
shareholding other than that belonging to promoters, FPIs and DIIs.
(Note: Public shareholding shown in the above exhibit should not be confused with "public shareholding" as defined by India's capital market regulator SEBI or Securities and Exchange Board of India. SEBI defines "public shareholding" as equity shares held by public and "public" means persons other than promoters, company's subsidiaries and associates. As per SEBI, every listed company in India shall maintain a minimum public shareholding or MPS of 25 per cent.)
It is observed
'public' shareholding has increased in line with increase in number of
shareholders in the past four years. The details are given in the above exhibit.
The
number of public shareholders in these stocks has gone up substantially in the past four years. For example, between end-Mar2020 and end-Mar2024, the number of public shareholders in Bharat Electronics has risen from 2.9 lakh to 13.6 lakh, a stupendous rise of 376 per cent.
In Ircon International, the number has gone up from 68,000 to 9.3 lakh, a staggering rise of 1,276 per cent in the same period.
On top of the big surge in number of shareholders, some of the stocks are afflicted with low float.
3. Low free float stocks
Free
float is defined as the number of equity shares of a particular
listed company that are readily available for trading on the stock exchange.
Free float is nothing but number of shares held by investors other than
the stake owned and controlled by promoters and their strategic partners
with controlling interest.
The combination of rising number of shareholders and low free float is problematic for stock prices.
There is enough anecdotal evidence to suggest retail investor frenzy may cause share prices to move up sharply and eventually the prices tend to fall -- this phenomenon is strikingly more noticeable in companies with suspect fundamentals (the
author doesn't have any data to prove that increase in
number of retail shareholders directly leads to rise and eventual fall in share prices).
Increase in public shareholding implies a concomitant decline in institutional shareholding.
The shareholding pattern of listed companies can be gleaned from data published by stock exchanges, namely, BSE and NSE.
Several PSBs have less than 25 per cent "minimum public shareholding" (as defined by SEBI -- see Section 2 above for more). With lower free float, it is easier for shady operators to manipulate share prices of companies.
There is an increase in number of shareholders of non-PSU listed stocks also, but the increase in PSU stocks is much more pronounced compared to non-PSU stocks.
In some of these companies mentioned in the above list, the institutional shareholding is meagre. Increase in number of retail shareholders blended with low institutional holding hints at market ebullience.
In some of these companies mentioned in the above list, the institutional shareholding is meagre. Increase in number of retail shareholders blended with low institutional holding hints at market ebullience.
Some of these PSU stocks have cross holdings from other PSUs.
For example, PSUs namely, LIC of India, Indian Oil Corporation and GAIL (India) hold a total of 20 per cent stake in state-owned ONGC.
If you exclude this 20 per cent, the free float in ONGC falls to 21.1 per cent -- which is less than the minimum prescribed by the regulator.
Free float in Mazgaon Dock Shipbuilders is only 15.2 per cent.
Punjab & Sind Bank free float is only 1.75 per cent of the total equity shares. One cannot understand why India's capital market regulator is lenient to such transgressions of mandatory norms.
Free float in Mazgaon Dock Shipbuilders is only 15.2 per cent.
Punjab & Sind Bank free float is only 1.75 per cent of the total equity shares. One cannot understand why India's capital market regulator is lenient to such transgressions of mandatory norms.
It may be mentioned Government of India, in financial year 2020-21, infused capital of Rs 5,500 crore into Punjab & Sind Bank resulting in the increase in government's stake to 97.1 per cent as of 31Mar2021.
Central Bank of India's free float is only 7 per cent, of which LIC holds 2.6 per cent. So, practically the free float in Central Bank of Inia is only 4.4 per cent.
In
addition to LIC holding of 2.2 per cent, other government entities hold
4.3 per cent in NLC India -- effectively bringing down the free float.
Higher promoter shareholding of more than 75 per cent leads to lower free float for trading in markets from liquidity point of view. The higher the minimum public shareholding, the better for non-promoter shareholders to trade in those shares.
Higher promoter shareholding of more than 75 per cent leads to lower free float for trading in markets from liquidity point of view. The higher the minimum public shareholding, the better for non-promoter shareholders to trade in those shares.
Liquidity in securities is a sine qua non for financial markets.
There are so many variables that affect stock prices and markets, so one should not focus too much on a single parameter like low float or increased number of retail shareholders.
However, given the steep rise in stock prices in recent years, higher number of retail shareholders, low free float (at least in some PSUs), inherent inefficiency of PSU managements, lack of operational independence, government's constant interference, bloated staff, onerous pension commitments, government usage of PSUs for extracting money via dividends and buybacks, and other factors, investors need to be cautious of the PSU stocks.
Some of these PSU companies may have sound business models or they may be monopoly businesses.
However, investors cannot ignore the indicators of market exuberance or at least they should not over expose themselves to stocks of state-owned enterprises.
4. Wrap up
There is no gainsaying the PSU stocks have been re-rated (meaning they are enjoying higher price-earnings multiples now compared to their historical valuations) due to a combination of momentum, better fundamental performance in recent years, rising investor sentiment and general market optimism.
A country's prime minister talking up PSU / railways stocks is an area of concern. This may be a good enough reason for investors to be bearish on PSU stocks. At times, markets are funny and brutal.
Without doubt, Indian stocks offer potential for returns for investors who hold them with patience for long periods of five to 10 years.
However, Indian stock market is at elevated levels on several parameters. Stocks that have gained the most are likely to be the biggest losers if and when the sentiment turns in Indian stocks.
(Disclaimer and disclosure: this should not be considered as a recommendation or investment advice; the author does not have any direct ownership in listed PSU stocks currently)
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References and additional data:
Tweet dated 21Jan2018 - 51% shareholding by government
Securities Contracts (Regulation) Rules, 1957 - PDF accessed 08Jun2024
SEBI study on individual traders trading activities - 90% of individuals make losses
Increasing number of shareholders
Abakkus Investments - PSU stocks loss (screenshot)
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Disclosure: I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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