SHAREHOLDING

PATTERN
&
SHAREHOLDERS
AGREEMENT

WHO CAN HOLD SHARES IN A

COMPANY?
Share Holdingcan be done by any investor right
from a person to a corporation to a FII.
When an entity or a person buys a large chunk of
share in another company, their intention may be
to get control in: The decision making power of the company
Election of the Board of Directors of the company
Controlling the management of the company

PATTERN

Data regarding the share holding pattern is available in the stock

exchanges website, in the companys website and annual reports.
Share holding pattern of a company generally involves:-

Promoters Holding Promoters may include domestic and foreign

promoters. Promoters are the entities that floated the company, and
to a large extent have seats on the Board of Directors or the
management.

Persons acting in concert with the Promoters. Relatives of the

promoters who hold shares fall under this class and are termed as the
Promoter group.

Holding of the Non-Promoters these include institutional

investors like Banks, Financial Institutions, Insurance Companies,
Mutual Funds , Foreign Institutional Investors and others like private
Corporate bodies, Trusts, Foreign Companies , you and me ..

Shareholding Pattern

BASIC RULES.

As a rule of thumb, higher promoters stake is perceived as positive

and a lower equity stake could mean low confidence of promoters in
their own company.

Rise in promoter stake is considered positive because promoters will

commit additional fund only when they are optimistic about future
growth of their company.

Similarly a higher FIIs stake is considered as positive and a lower FII

participation could mean low confidence of FIIs in the company.

Rise in FII stake is considered positive as they will commit funds only
when they are totally optimistic and confident about the future
prospects of the company.

Too high or too low of promoters stake or FII holding is not favorable.

PROMOTERS AND FIIs The two

categories of shareholders to watch
While analysing the shareholding pattern of the company, the two
important categories to be watched are the promoters stake and the
FIIs stake in that company.
An increase in promoter stake does not always constitute a sign of
confidence.
It is also necessary to see whether fresh funds have come in. If fresh
fund have been invested, where will they be invested. Answers to these
questions would help investors to determine whether jump in promoter
stake is beneficial to the company.
However, an increase in FIIs stake is a good sign It shows that they are
bullish on the stock. At the same time, the flip side of huge FII holding is
that the stock price will be subject to huge price volatility when they off
load the stake.

HOW TO ANALYSE

Analysing the holdings of various categories of investors would give you

insights into the pattern of control in the company.
Rise or fall in promoters holding is to be studied by looking at two aspects.
First what is purpose of promoters in raising or reducing their equity
stakes and second, the methods promoters have adopted to increase or
reduce their ownership.
If the promoters are increasing their stake to pay off debts and strengthen
their balance sheet. This is certainly positive for the shareholders.
Companies that have gone for share buy back also see rise in promoters
stake.
The core objective of a buyback is to create wealth, but it also increases
promoters equity stake at no additional cost. A rise in promoters stake
due to merges or buyback means little for investors in real terms.

 Promoters of companies that have opted for rights issue are forced to step in
and bail out the unsubscribed portion just in case the rights are
undersubscribed. Here, there will be an unintentional rise in promoters stake.
Shareholders declining to subscribe to rights issue and promoters chipping to
rescue the issue do not qualify to be positive development.
A decline in promoter holding should also be analyzed in detail.
Decline in promoter holding can be due to various factors such as issuing fresh
share towards employee stock option, or it could be due to offloading/issuing of
fresh shares to strategic/financial partners. These changes should be carefully
studied.
Promoters offloading their holdings in the open market are a warning signal.
Some dubious companies announce positive development periodically;
promoters keep on offloading equity stake at the same time. It is well laid-out
trap for investors.

 If you see promoters increasing their stakes in successive quarters, you know
that thefinancial performanceis going to be good and thestock priceswould
possibly be higher.
However, its unusual to see promoters holding increase on a regular basis. They
usually step in to buy after a sharp market decline to shore up their holdings.
A very high promoter holding is not a good sign. A diversified holding and a good
presence of institutional investors indicates that promoters have little room to
make and carry out random decisions that benefit them without gauging how it
would affect earnings and other shareholders.
Very low stake of promoters is perceived as diminishing confidence of promoters.
This results in rampant sell off which results in loss for investors.
FII holdings in stocks are used as indicators in stock selections; stocks with high
FII holdings are largely favored. However, such stocks could take a hit should the
FIIs decide to sell their stake. Retail investors may perceive such selling off to be
a lack of faith in the stock by the FII.

 Holding by mutual funds and insurance companies is an indicator on how

favored a stock is.
Multiple funds holding the stock could be a sign of growth potential.
Therefore, such high institutional holding may mean your investment is a
tad safer since that company may then be more professionally run.
While looking at the shareholding pattern, figures for a single period is
also unlikely to tell you much. Compare holding patterns with those of
the previous quarters to check how holdings have changed.
Along with holding patterns, companies also disclose the entities other
than the promoters that hold more than 1 per cent in the share capital.
Companies are also required to declare the promoters shares that have
been pledged as debt collateral.

Shareholders Agreement e
Shareholders

A Shareholders Agreement is a contract between

shareholders of a company with the various
provisions that will govern each of the
shareholders who are party to the agreement vis-vis the Company and the shares held by each
such shareholder and also the provisions that will
govern the management of the Company as
agreed to by the parties to the agreement.

NEED FOR EXECUTING

SHAREHOLDERS AGREEMENT
Shareholders agreements lay down clearly defined
rights and obligations between and of the parties, i.e.:
a. Appointment of Directors and quorum requirements;
b. Determining the matters requiring special resolution
or providing veto rights to certain shareholders (more so
in case of private equity and venture capital partners);
c. Financing the requirements of the company;
d. Restrictions on right to transfer shares freely;
e. Defining the obligation of each of the shareholder
towards the company.

MECHANISMS DOES THE LAW OF INDIA PERMIT

FOR REGULATING SHARE TRANSFERS?

A.

Right of first refusal:

This is an agreement between the

existing shareholders whereby the
shareholder wishing to sell to a third
party must first offer the shares to the
holder of the first refusal right.
If the holders of the right of first refusal
do not buy the shares, the shareholder
can normally sell freely to a third party.

B. Right of first offer:

This is a variation of the right of first refusal
in which a fixed price is agreed to from the
outset.
The shareholder wishing to sell shall first
offer the shares to the holder of the right of
first offer holder at the fixed price.
If the holder of the right does not purchase
the shares, the shareholder wishing to sell
is free to sell it to a third party.

C. Drag-along and Tag-along Rights:

'Drag-Along Rights' A right that enables a majority
shareholder to force a minority shareholder to join in
the sale of a company. The majority owner doing
thedraggingmust give the minority shareholder the
same price, terms, and conditions as any other seller. .
Tag-alongright (TAR) :Tag-along right is the opposite
- is a legal concept in corporate law. The right assures
that if the majority shareholder sells his stake,
minority holders have the right to join the deal and
sell their stake at the same terms and conditions as
would apply to the majority shareholder. This right
protects minority shareholders.

D. Buy-back rights:
These give the company the
right to redeem the shares of
a
certain
shareholder
in
specific circumstances, such
as withdrawal or death of the
shareholder.

E. Call option: an option to buy

assets at an agreed price on or
before a particular date.
Call option gives its holder the right
to buy a specified number of shares
of the underlying stock at a
predetermined price (strike price)
between the date of purchase and
the options expiration date.

F. Put Option: an option to sell

assets at an agreed price on or
before a particular date
Put option gives its holder the right
to sell a specified number of
shares of the underlying common
stock at a predetermined price
(strike price) on or before the
expiration date of the contract.

ARE MINORITY SHAREHOLDERS

PERMITTED TO PARTICIPATE

There are no specific provisions under

Indian law to ensure participation of
minorities on the board of directors of a
company.
Also, Indian law does not provide for
provisions ensuring minority control over
board of directors.
However, the minority shareholders can be
given the right to nominate directors on
the board of directors by contractual
arrangement between the shareholders.

TYPES OF SHAREHOLDERS AGREEMENTS

Pre-incorporation/formation agreement an agreement put in
place between the parties who intend to form a company
and to be its initial shareholders.
Subscription
and
shareholders
agreement:
a
shareholders agreement entered into between parties who
are subscribing for shares contemporaneously with the
entry into the shareholders agreements.
Shareholders agreement governing a 50:50 shareholding
position.
Shareholders
situation.

agreement

governing

majority/minority

Shareholders agreement governing a joint venture situation.

ADVANTAGES - SHAREHOLDERS AGREEMENT

Privacy: The predominant reason for using a
Shareholders agreement is that it is a private
document between parties thereto which can be
made
subject
to
express
confidentiality
restrictions.
By contrast the Articles of Associate are a public
document available for inspection by members of
the public in the Companies Registration Office.
This makes the Articles of Association an
unsuitable means for dealing with matters such
as, for eg., the remuneration of directors or other
sensitive internal management matters.

 Greater Binding Effect: As explained above

articles of Association can only bind a
shareholder in his capacity as Shareholder.
By contrast shareholders agreements may
be used to give rights and impose
obligations on shareholders. Eg., binding a
person in his capacity as director or as a
creditor or agent.
However one needs to be very careful in
imposing obligations on a party in his
capacity as a Director.

 Variation: As explained above

Articles of Association can be
amended by way of a special
resolution.
By contrast, unless a shareholders
agreement expressly provides for a
specific variation mechanism it can
only be varied by unanimous
agreement of the parties thereto.

DISADVANTAGES

Binding Effect: Because of its nature a shareholders

agreement only binds the parties thereto and does
not automatically bind all shareholder.
Therefore if a party transfers his shares the
transferee will not automatically be bound by the
terms of the shareholders agreement.
To circumvent this it is normal to provide in a
shareholders agreement that an existing shareholder
who is party to a shareholders agreement can only
transfer his shares if he procures that the transferee
enters into what is known as a deed of adherence
which joins the transferee as a party to the
shareholders agreement.

 Interpretation: Again as shareholders agreements

are contracts they are subject to the ordinary rules
of contract law, in the event a dispute arising as to
the meaning of a provision in the shareholders
agreement a court would, as a primary means of
interpretation, seek to establish what was the intent
of the parties based on the wording of the contract.
By contrast the language in articles of association
has become in many respects fairly standardized
and many of the provisions used in articles of
association have been judicially considered over the
years and there may therefore be available judicial
precedent to assist in the interpretation of those
provisions.

WHEN A SHAREHOLDER BE COMPELLED TO

TRANSFER HIS SHARES

Where an individual shareholder becomes bankrupt.

Where a corporate shareholder becomes insolvent or

has a receiver or an examiner appointed.
Where a corporate shareholder transfers shares to
another member of its group and that transferee
ceases to be member of the group.
Sometimes but less frequently, where an individual
shareholder dies.
Where an individual shareholder is an employee of
the company and he ceases to be employed by that
company.

THANK YOU