Rise in Individual shareholding and fall in price, understanding the relation.

Relation between fall in share price and rise in retail shareholding.

Rise in Individual shareholding and fall in price, understanding the relation.

Article published as on Sunday, 8^th April, 2020 at 3:00 a.m.   

I have read various articles which state that when share price falls along with high increase in retail holding it’s a warning sign. I was given many examples but no explanation why this happens? I always asked for  logic behind this relation in my mind.

Finally I found something which connected the dots and made me understand WHY? And I will be sharing the same with you.

(Note - companies have been taken here only as an example.)

In May 2019 national elections the voter turnout ratio was 67.11%

But when we look at voting percentage of HDFC bank at its AGM resolution by 

public non-institution investors (Individual shareholders) it was just 5.5%

And situation is similar across the board- lower participation by individuals in voting of resolutions.

This is important for our topic- relation between share price fall and rising retail holding.

As one share one vote theory applies here, making it in interest of huge shareholders to vote making this ratio even worse.

Point I want to make here is that individual shareholders don’t participate actively, EVEN when we have e-voting system and in national election one has to stand in ques.

This is all because of lack of awareness among investor regarding their rights and duties.

Institutions on the other hand have been mandated to vote on resolutions by SEBI. And they can outsource this work from proxy advisors.

Yes bank’s example see the table below

  

Yes bank	12-june-2019 (AGM)	7-february-2020 (EGM)
Institutions holding	50.72% (as on 30/6/19)	29.38% (as on 31/12/19)
Institution voting %	79.5238%	79.2597%
Public non-institution holding (individual shareholder)	20.46% (as on 30/6/19)	47.96% (as on 31/12/19)
Individual shareholder voting %	9.1448%	4.1251%
Total voting (of share capital)	65.1825%	33.3185%
share price	134.75	38.7

 

                                 -sources yes bank and BSE website.

We can see in June quarter already individual shareholding was above 15% and then it rose even further in December quarter data, concluding individual averaged and bought new shares, but did not participate in voting.

This along with already present problems was a red flag and a early warning sign for investor to be cautious.

We can understand as retail holding goes up and voting percentage goes down it shows lack of interest in participation of company affairs.

Thing is that institutions whenever sense a degradation of corporate governance they can sell even at a loss and exit. For them quality of management is much more important.

And retailers average out at lower levels. 

Companies with bad management take benefit of this thing that retailer’s don’t participate and continue their exploitation of company resources. Slowly institutions sell and only retailers are left.

To conclude I would say institutions are known as smart money and if they are selling company stake find out the reason.

If it is due to problems in corporate governance one should be cautious and avoid further buying.

Also companies with already 15% or more retail holding when they fall, one should definitely look into shareholding pattern and find if individual  shareholding has risen and then if study there is any problem with management or corporate governance.