Promoters of family-run businesses steadily increasing shareholding in their companies: ISB report

Promoters are increasing their shareholding in the family firms and decreasing it in non-family firms, showing the confidence in their companies whether it is a family business group firm (FBGFs) or standalone family firm (SFFs). Promoters of MNCs have also increased the stake in their Indian subsidiaries, probably indicating their belief in the 'India story'.

The findings are a part of the research study titled "Family Businesses: Promoters' Skin in the Game 2001-2017" by Indian School of Business (ISB)'s Thomas Schmidheiny Centre for Family Enterprise, which analysed the ownership pattern of family firms in comparison to the non-family firms. Almost 4,615 firms listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) of India, across different ownership categories, for the period 2001- 2017 were studied.

The promoter stake in State Owned Enterprises (SOEs) has been steadily falling over in the past decade. This is in line with the policies of the successive governments in India to divest their holding in the SOEs. Other business group firms (OBGFs) and standalone non-family firms (NFs) have also witnessed a decrease in the promoter shareholding.

"It seems to imply that the engine of growth of Indian businesses will not be dependent on overseas or other promoter categories. Instead, promoters of family firms will continue to play a major role," says Nupur Bang who conducted the study.

In family business groups, the preferred mode to hold shares is through holding companies. This enables, the holding companies or trusts that hold shares of all companies on behalf of the family members, to enable better resource allocation, control, realisation of synergies and tax planning within all group level firms; and better management of ownership, inheritance and payouts at the family level. It also allows the family to professionalize each of the firm, while the family maintains a bird's eye view at the group level.

This is in contrast to standalone family firms (SFFs) where the family members prefer to hold shares directly as individuals or Hindu Undivided Family, making their structure less complex both at the family and the business front. As they grow the complexities of inheritance, succession and growth would force them too to adopt better structures of ownership. Entry of the next generation into the business and more interest in the business by the extended family with better performance and increased scale, would point towards a need to streamline ownership and be prepared for future structure, governance and professionalization needs of the firm. Therefore, there is a gradual increase in shareholding through companies even in the case of SFFs.

Institutional Shareholding in Family Firms

Non-promoter institutional shareholding is lower in family firms, when compared with non-family firms, and it has decreased further in 2007-2017. As a block holder, institutional shareholders influence the governance and strategy of the firm; if they refrain from investing in family firms, the pursuit of governance takes longer. Institutional investment is inversely proportional to promoter's shareholding, especially in the case of family firms; higher preference is given to the firm where family ownership is lower.

Non-family firms in general have strong formal internal control mechanisms to keep the personal interests of managers out of the company's functioning. Consequently, the probability of a strong and independent corporate governance mechanism is greater for a non-family firm. Institutional investors have a strong preference for firms with good governance. Thus, there is a higher institutional shareholding in non-family firms and other business group firms.

Except non-family firms, the study shows a decline in the shareholding of non-promoter non-institutional shareholders. It suggests that investors' preferences might have further shifted to alternative asset classes like real estate, gold, and fixed deposits or they might be investing through institutional investors like the mutual funds.

The study found that most of the decline is due to small investors with up to Rs 1 lakh worth of shares. These small investors have reduced their holdings across all ownership categories. This may be due to the lack of disposable income in the hands of small investors. Also, such investors are typically the last-in in a bull market and end up buying at a very high price and selling cheap when the market starts to stumble. Such repeated experiences make them wary of the market.

FBGFs and SFFs have fairly large non-institutional shareholdings, even though it's been on a decline. On deep diving, it was found that the average shareholding may be skewed due to outliers. In the case of family firms, more so in SFFs, there are a large number of firms that report a very large percentage of shares being held by non-promoter non-institutional shareholders.

Moreover, for many of them, the number of such investors remains constant quarter after quarter. That is a very unlikely scenario in the case of small investors and leaves a lot to speculation. In a few cases, the names of shareholders disclosed by the company under the category of non-institutional shareholders with shares in excess of Rs 1 lakh have the same surname as the promoters or surnames from the same community. This calls for the regulator to closely scrutinize the shareholders in this category to ensure that the law is obeyed in spirit and not just in letter.

"The ownership pattern of listed businesses in India is fairly concentrated, especially in the case of family firms, SOEs and MNCs. While this has significant positive effects, there is also a need to keep close vigil on their governance practices," says Professor Kavil Ramachandran, Executive Director, Thomas Schmidheiny Centre for Family Enterprise who also lead the study.