Behind of any volatility in any company’s shares, there are number of reasons or factors which drive this volatility. A share could face volatility due to volatility in main market, or due to some news outflow also. Purchasing of shares by Institutional investors from open market may also be a sole reason for volatility in a share. The list of possible reasons for the volatility in a Share will go on and you would get tired if you go through it.
But in this post, we are discussing why Indian stocks are born to be the volatile masters as compare to other Market securities. One of the basic and sole reason for volatility in Indian shares is Manipulation which is common in India. In India, the person is recognised more powerful when his/her pockets are also filled with a heavy cash. In fact, this is the real sense of defining ones power in the whole world. But in india, this rule of defining is followed in such a way that none of any other country would follow it in such way.
Manipulation of share price or any other goods price is practiced all over the world. But to limit this, there is a important measure which is widely used all over the world. To reduce manipulation, the common strategy which is used widely is to promote the Buyers and sellers in the market.
To understand how more buyers and sellers helps to reduce manipulation, you need to first understand that why manipulators are able to manipulate market or shares.
In a particular share say ABC, suppose, total number of shares are 1 Crore and the share price of ABC share is quoting around Rs 10/share. From the total shares i.e 1 crore, promoters of company holds 70 percent stake or 70 lakh shares of company. 10 percent stake is owned by a Non promoter party say XYZ family. And the remaining the 20 percent or 20 lakh shares are owned by Public.
Now, assume that you wish to manipulate the shares of ABC due to your own benefits. To manipulate shares, you will have to first know about the total number of sellers in shares so that you can estimate the cost which will incure during this process.
If we assume that retail/public sellers amounting to 10 lakh share will sell all their shares at the maximum price of Rs 20, the possible/maximum cost you will incure wouldn’t cross Rs 2 Crore ( 10 lakh shares × Rs 20 share price). In this, we have assumed that remaining shares held by public are not going to come for any sale below Rs 20.
The above example suggest that you will be able to increase the price of ABC shares upto Rs 20 with a maximum cost of Rs 2 crore. And by doing this, you will be able to get 50 percent free fload shares in your hand.
However, if we change this assumed number of shareholding pattern to another one say
- Promoters owns 20 percent stake in company.
- XYZ family owns 10 percent stake which is not free fload.
- The remaining 70 percent is owned by Public means 70 lakh shares.
The situation will be much different now! By assuming that half of the total shares held by public ( 35 lakh shares ) would be available for sale upto Rs 20, your cost may now rise upto Rs 7 crore ( 35 lakh shares × 20 share price ). This 250% rise in cost is the reason why Indian stocks are so volatile and easy to manipulate despite of number of norms/rules of SEBI.
Take a look at the below given table….
|US Company||Promoter Stake||Indian Company||Promoter Stake|
Translating above data, we get
Average Promoter stake in Top 5 US Companies 9.6%
Average Promoter stake in Top 5 Indian Companies 44%
In Indian market, promoters own much of the total outstanding shares which lefts only a small portion of shares available for trading in Open market. In India, shares or companies where promoters have more than 40 percent stake are only considered as a good investment option because it indicates that Owners of company are also confident on their business. If promoter stake is at very lower level like around just 10-20 percent, it is considered that promoters are not expecting their businesses to do well in upcoming years.
There is one more reason for why Indian Corporates have high promoter stake. In our country, a people having its own shop would like to bring his son also on his shop for work, after he would take a retirement. Similar situation is with registered corporates in India.
Founders of different large businesses consideres to transfer their stake in Business and Controlling power to next generation i.e his/her Son or maybe Daughter also, as a first priority. But in other countries like USA, the situation is little different.
Shareholding Pattern in USA
In USA also, founders of Companies like Facebook, Google, Amazon also likes to have full or major control on their company. But they do this with a little twist.
Mark Zuckerburg has just 16 percent ownership in Facebook. But in terms of voting rights, he controls nearly 60 percent of the stock.
That’s because Zuckerberg owns the majority of the voting rights to the company. Facebook’s Class B shares, controlled by Zuckerberg, are about 16 percent of the total shares. But their Class B shares have 10 votes per share while the Class A shares that trade have only one vote per share.
Surprisingly, it’s not that uncommon: 355 of the companies in the Russell 3000 (11.8 percent), a U.S Market Index, have a dual voting-class structure. In most cases, founders and other insiders control the votes.
Google, for example, has three classes of stock, but it’s the B Shares — controlled by insiders Larry Page, Sergey Brin and Eric Schmidt — that control over 60 percent of the voting shares. The publicly traded Class A shares have only one vote per share (GOOGL), the other publicly traded shares, Class C (GOOG), have no voting rights. The B shares — the one that matters — has 10 votes per share.
Shareholding Pattern in Asia
In Continents like Asia also, top 3 Companies (in terms of Market capital) have promoter stake below 10 percent.
- In Asia’s most valuable company Tencent holding, Ma Huateng owns not more than 9.7 percent stake.
- In Asia’s 2nd most valuable company Alibaba, Jack Ma owns 6.2 percent.
- In Samsung Electronics which is the 3rd most valuable company of Asia, Lee Kun-hee owns about 4.7 percent stake.
From the above data, it is very clear that in India Corporates, average promoter stake holding is comparatively higher than any other developed country.
However, Keeping your major holding in your Business, which you found with the hard work, is not wrong at all. But due to this, it generally leads to a inflated or wrong stock prices as market capitalization is based on only a fraction of shares being traded (if the major shareholder owns 70 percent of the company, only 30 percent of the shares are left to be traded in the market).
But at the same time, only this structure gives the way to have most of the different kinds of stocks in Indian stock market. You will find undervalued or badly valued stocks, fairly valued stocks and Highly priced stocks also along with availability of F&O contracts in many securities.
So, the final conclusion is that Indian Stocks are so volatile because of the shareholding pattern of Indian Public companies which, most of the times, restricts real participation of the investors in controlling any rise or fall in the shares. But at the same, this structure of shareholding gives an opportunity, most of the times, to the small and institutional investors in our share Market.
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