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Monday, August 02, 2010

The push for atleast 25% outside shareholding

The Indian authorities are in the process of pushing listed companies to have atleast 25% shareholding with outside shareholders. I wrote a column in the Financial Express, titled Outside shareholding and market liquidity: Indian empirical regularities where I look at how size and outside shareholding come together to matter for stock market liquidity.


  1. What is surprising is that we don't actually see any block/bulk trades by large outsiders. Empirical evidence on India has suggested a sharp decline in outside ownership and also no supporting evidence on firm value.

    The policy makers would have to analyze following issues before making 25% a mandatory requirement:

    1. Are there any outside buyers of 25%?
    2. What about their "relationship" with promoters. e.g. there are private corporate bodies who may be suppliers or customers of the company.
    3. How active is the block trading in India?

  2. Interesting observation. Can one infer here that, with small size, public holding should be more - in essence to attain better liquidity higher public holding and this should be a dynamic function and not a static one.

    Can't we have a system where any corporate using public funds by way of funds from banks, public institutions should be listed with a turnover of Rs.100 Crore and above. This will bring many of good quality management on to the bourses and also wealth creation also get shared in somewhat equitable(?) manner.

  3. Ajay - interesting analysis. However, just based on this data, how do we know that correlation is causation in this case and thus if the policy solution being proposed is really attacking at the heart of the matter.

    Liquidity and bid/ask spread here ultimately depend on how many buyers are there in the market. Thus size should definitely be a factor. In the case of small firms, for same % of outside holding thus you would have a lot less buyers in the market. The fact that spreads are low for larger companies indicates that OS % may not be the factor that is important and that it all boils down to just size. I am not sure if this is really the case, but some more statistical analysis might be required to filter this out. And if size is the only first order factor, then the policy solution may not really be that effective.

    That said, investors usually require a higher premium for small cap firms vis-a-vis larger firms for this precise reason of liquidity and so I don't see why a policy solution is even required if its only to improve liquidity.

  4. Even though SEBI policies have been better in recent times but they are still slow on execution front. Indian markets have been the FII's playground of cash-derivatives game. Cash market is used systematically by their sophsticated algorithms to earn fat profits from derivatives markets. There is an urgent need for not only raising free float but also compulsary delivery based settlement.

    With so much ease, FII computers manipulate markets that even charts shows exact parallel lines. These guys know that out of 50 companies in nifty, 15 companies have almost 65% weightage in the index and its very easy to target nifty via market orders.

    Forget Nifty PE of 23, technicals and anemic results of current quarter, these guys computers won't sell until central banks stop liquidity flows and ask their money back. Policy makers won't learn and these guys are again repeating mistakes of recent history. Even morally corrupt media is inviting general reqailers via enticing offers by mentioning that "Long positions are seen in xyz stocks". How can these ppls say that When for every long position, there is an equivalent short position. Thats why Raghuram Rajan says that India is steady but still very slow.


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