As Indian-listed equities are witnessing a surge in domestic and foreign institutional fund flows, a decline in retail and non-promoter individual holdings in blue chip companies (decreasing free-float) has raised concerns over availability of quality stocks for bulk investment. For institutional investors, while the issue is — where to invest the large inflows received, for the retail investors, who are generally crowded out by institutional investors and company promoters, experts say accumulation of blue chips and good quality mid-cap stocks is a key. This is because as and when large inflow follows the pick-up in Indian economy, most of the money will chase such stocks.
The aggregate of non-promoter individual holdings in 50 companies that makes the benchmark Nifty at the National Stock Exchange has fallen from 9 per cent in June 2008 (before the global financial crisis) to under 7 per cent in June 2015. While there are 16 companies in the list where such holding is less than 5 per cent, there are 14 companies that witnessed more than 3 percentage point decline in their holdings during the period. This has been a result of more institutional money chasing the same stocks and promoters looking to increase their holding through buy backs over the last few years.
In fact, a look at the 200 companies that form BSE 200 index shows that almost 34 firms saw promoters increasing their stake by 5 per cent over the last seven years. The list includes multinational companies such as GlaxoSmithKline, Hindustan Unilever, Siemens and ABB among others.
However, the inflow of funds into the market has been on a rise. Over the last 15-months, while the equity mutual funds have witnessed a net inflow of more than Rs 1 lakh crore, foreign institutional investors (FIIs) too have pumped in a net of Rs 1,08,942 crore. With the inflow of funds expected to remain strong, the decline in free-float of blue chip companies would only be furthered. Also, with the drying up of IPOs over the last few years, traders feel that institutions may get limited for options in large-caps.
Chandresh Nigam, MD & CEO, Axis Mutual Fund, said that there is an issue with free-float in good quality stocks in India, so when large capital flow happens, they will all rush for the same firms. “For market participation, the primary requirement is to have a large number of good-performing firms and that number is small in India. As of now, 52-53 per cent of the market is owned by promoters, 22-23 per cent by FIIs and about 9-10 per cent by local institutions. The rest is free-float. So there is definitely a constraint in that aspect,” said Nigam.
The CIO of another mutual fund said that over the last couple of years there have been strong inflows into Indian equities from domestic MFs, FIIs, long only pension funds along with a decline in redemptions. “This has led to a shrinkage in the free-float in the short-term. However, this should get sorted in the medium-term because when a growth phase comes back new firms come in. Also, Centre’s disinvestment plan will increase the float,” said the CIO of the fund house.
A decline in free-float (shares that are readily available for trade in the market) will not only make it tougher for institutions to get a big chunk of the equity share in a company at one go, but also takes the valuation up, making the stock expensive.
“It has not been a challenge in terms of liquidity as of now but if there is a demand supply gap that builds up then it will reflect into the prices and they will become expensive,” said Pankaj Pandey, head of research at ICICIdirect.com. A market expert said that in some cases one institutional investor sells and the other enters, but the window of opportunity may be limited. There are others who feel that while it is not a big concern now, it should not be an issue going forward too. “The underlying assumption is that there will be growth in the economy, capex cycle will be there and more disinvestments will happen and that will open up investment opportunity for investors,” said S Naren, CIO, ICICI Prudential AMC. Another industry insider pointed that in recent times a lot of focus has also come on mid-cap firms and money is flowing into good quality mid-cap stocks. So the pool is widening.
Nifty firms that have seen a decline in individual holding over the last seven years include Infosys, Ultratech Cement and IndusInd Bank. In case of Infosys, non-promoter individual holding over the last seven years has come down from 18.7 per cent in June 2008 to 12.9 per cent in June 2012. It, however, fell below 10 per cent at the end of the previous quarter. Experts say that a sharp decline in the individual holding not only reduces the liquidity of the stock but also limits the options for institutional money chasing good quality stocks. While the Nifty firms had a total market capitalisation of Rs 57.8 lakh crore as of August 17, 2015, the value of non-promoter individual holding amounts to only Rs 4,03,313 crore or 6.98 per cent.
A Prime Database analysis shows that the retail holding in smaller firms, which institutional investors stay away from, is very high. While the total FII holding of 6.36 per cent in NSE listed firms was valued at Rs 19.18 lakh crore (June 30, 2015) and 5.12 per cent holding of DIIs was valued at Rs 10.48 lakh crore, the value of 21.34 per cent of retail investors amounted to only Rs 7.94 crore. “This is because if one looks only at Nifty firms, the retail share is only around 7 per cent,” said Pranav Haldea, MD, Prime Database.
What should retail investors do?
The list of ten firms in BSE 200 index that have seen maximum rise in non-promoter individual holding includes MCX, Unitech, Suzlon and Jaiprakash Associates. While these companies have been under pressure for various reasons, in case of Jaiprakash Associates and Unitech, the individual holding went up even though institutions reduced their holding significantly in the period between 2012 and 2015. There are several such examples in the market. Supreme Industries that has seen its share price rise 18-fold over the last seven years, which led to institutions raising their holding from 3.1 per cent in June 2008 to 28.6 per cent now, non-promoter individual holding declined from 35.8 per cent to 17.45 per cent.
Experts say that retail investors should closely follow institutional investors while picking up stocks.