Promoters using funds of listed company to increase their stake, Low float due to promoters’ indirect shareholding

Modified on June 29, 2020

The current article in this series provides responses related to:

  • How to interpret the promoters’ usage of funds of a publicly listed company by the route of investments in promoters’ entities to increase their stake in the company?
  • Should one invest in companies with low float due to indirect promoters’ shareholding?

 

How to interpret the promoters’ usage of funds of a publicly listed company by way of investments in promoters’ entities to increase their stake in the company?

First Read: Analysis: Dynemic Products Limited

Dear Doctor,

Thanks for the detailed coverage.

Co-incidentally, I was also studying this company and found your note very helpful. For the time being, I will restrict myself to the shareholding issues.

The public owns ~60% of Dynemic Products Limited (DPL) which in turn owns 49.22% of Dynemic Holdings Pvt. Ltd (DHPL). Remaining shares of DHPL are held by promoters of DPL. So indirectly, the public owns 29.53% of DHPL. Quoting from the above article:

“assuming current (Sept 30, 2017) shareholding structure of promoters vs. public shareholders of about 40:60 in Dynemic Products Limited, the share of contribution of Dynemic Products Limited’s funds (49.22%) in DHPL can be bifurcated into promoters (19.69% = 49.22% * 40%) and public shareholders (29.53% = 49.22% * 60%).”

Now DHPL also owns 1.34% of DPL. Hence, the current stake of 1.34% of DHPL in DPL is essentially held as 0.40% by Public, 0.26% by DPL and 0.68% by promoters of DPL. Therefore Public ownership in DPL is essentially 60.4% and not ~60% as it looks on the face of it.

So while DHPL is classified as a promoter group, 29.53% of every rupee invested in DPL by DHPL belongs to the Public.

  • Are such cross holdings allowed?
  • Should the Public’s holdings in DPL shown as full 60.4% or higher in case DHPL keeps on raising stake?

I could not get your interpretation of promoters’ using public money to raise their stake. Whatever DHPL invests back in DPL, 29.53% of it is by the Public. So Public’s stake also increases to the extent of 29.53%. Right?

I know I am missing something here. Please help me understand this better.

Thanks! 

Author’s Response:

Hi,

Thanks for writing to us!

We request you to analyse the situation from the following aspect:

Suppose, in future, on any proposed resolution in the AGM of DPL, there is a dispute between the stand taken by promoters and public shareholders. Then, in whose favour the voting done by DHPL would be considered?

Also read: How Promoters use Loopholes to Inflate their Shareholding

We would suggest that in case of further clarification, you may consult any CA or any lawyer/counsel who would be in a better position to clarify the applicable laws in this case.

All the best for your investing journey!

Regards

Dr. Vijay Malik

 

Should one invest in companies with low float due to indirect promoters’ shareholding?

Hello Mr. Vijay,

My query is about companies (mostly small caps), which have a very low float in the market. Although SEBI has a guideline which stipulates that promoters can only have a certain percentage maximum holding in listed companies, one comes across many firms where large portions (up to 95%) is held by promoters indirectly hence bringing the float to less than 5%.

  • Why do firms do this?
  • What is the advantage of staying listed for such firms?
  • Is it safe to purchase stocks of such companies from the point of view of a minority investor?

Thanks

Author’s Response:

Hi,

Thanks for writing to us!

We give more weight to management assessment than the float assessment. We believe that if an investor is not finding the management trustworthy, then she should avoid the stock altogether and on the contrary, if she has faith in the management, then she may take different views on the float.

Also read: How to do Management Analysis of Companies

All the best for your investing journey!

Regards,

Dr Vijay Malik

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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