Family firms see rise in promoter holding that is playing key role: Study

The steady increase in promoter holding is a signal of growing confidence in the potential of their company the business school said in a release

Promoter shareholding has seen an increase in family-backed companies, while it is on the mend in non-family backed firms, reveals a study by Hyderabad-based Indian School of Business (ISB). Institutional shareholding has been lower in family firms when compared with non-family firms and it has decreased further between 2007 and 2017, the study says.

“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 along with three others.

The research analyzed equity ownership in 4,615 companies listed on the National Stock Exchange (NSE) and BSE for a period between 2001 and 2017.

The steady increase in promoter holding is a signal of growing confidence in the potential of their company, thereby instilling confidence among the investors, the business school said in a release.

The study also revealed an increase in holding by multi-national companies (MNC) in their domestically-listed subsidiaries, “indicating their belief in the India story”, said ISB.

On the other hand, public sector undertakings (PSUs) also saw a steady decline in government holding due to disinvestment undertaken by successive governments. Also, other business group firms (OBGFs) and standalone non-family firms (NFs) have also witnessed a decrease in promoter shareholding.

According to the study, the most-preferred route to hold shares for family business groups was through holding companies, while for standalone family firms it was through direct individuals or Hindu Undivided Family (HUF).

“The holding companies or trusts that hold shares of all companies on behalf of the family members 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,” says ISB.

Complexities of inheritance, succession and growth force companies to adopt better structures of ownership, it added.

Except at non-family firms, the study showed a decline in the shareholding of retail investors.

“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,” ISB says.

ISB said non-family firms had strong 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,” it added.