History suggests that, barring exceptions, companies with high promoter holdings generate more returns on equity than those with low holdings
24-Apr-2015 •Vikas Vardhan
The promoter plays a vital role in a company as the promoter group constitutes the management in most Indian companies. Moreover, given his holding level, the promoter has a considerable say in appointing the board of directors and the management of the company. We wanted to check if there is a relation between the promoter holding and outperformance of a company. So, we divided 420 companies of the BSE 500 index companies into four quartiles (excluding public sector companies and those without financial history for five years) as per the promoter shareholding and checked their respective average returns on equity (RoE). The data say that companies with higher promoters' holdings have performed better than those with lower holdings in terms of long-term average RoE of five years. To eliminate the exceptional cases which may influence the average figure, we also checked the median RoE and still the answer is almost the same.
Hence, the more the promoter holding in a company, the more are the chances of its outperformance.