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Corporate finance_Impact of Shareholding Pattern on Corporate Governance & Financial Performance

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    Corporate finance_Impact of Shareholding Pattern on Corporate Governance & Financial Performance Corporate finance_Impact of Shareholding Pattern on Corporate Governance & Financial Performance Presentation Transcript

    • Group 4_Section CAnand Kumar 12P127Bhoomi Ashwin 12P131Chirayu Gandhi 12P135Rakshit Sharma 12P160Saurabh Saxena 12P167Soumyajit Sengupta 12P171
    • • Purpose of the project is to understand the link between • shareholding patterns and corporate governance • shareholding pattern and financial performance• Approach • Qualitative: based on the theories from numerous literature reviews • Quantitative: based on the multivariate regression analysis for chosen company and around 20 of its peers Shareholding Investment Pattern Investor Corporate Preferences Governance Financial Performance
    • • Ownership Structure(Shareholding Pattern) • Distribution of equity w.r.t votes and capital but also by the identity of the equity owners • Of major importance in corporate governance because they determine the incentives of managers and thereby the economic efficiency of the corporations• Corporate Governance • Refers to the way a corporation is governed • Technique by which companies are directed and managed as per the stakeholders’ desires• Financial Performance • Financial state of the firm over a particular period of time • Key Indicators include RoE, EPS and DPR
    • • If Chairman is an Executive Director, then 50% of the Board has to be Non-Executive Directors• If Chairman is a Non-Executive Director, then 33% of the Board has to be Non-Executive Directors• Necessary for CEO & CFO to maintain tight internal controls and implement any remedial measures to controls which are lacking• All companies need to submit a Quaterly Compliance Report to Stock Exchanges• Auditor’s Certification required with regards to Compliance and this has to be attached to the Director’s Report• Compulsory provision of an Audit Committee chaired by a Director who has in-depth financial knowledge
    • • A formal Code of Conduct needs to be adopted• Whistle-Blower Policy has to be incorporated into the company culture• Term served by Independent Directors on the Board has been Restricted• Necessary to incorporate a Shareholder’s Grievance Committee• Limit to the Number of Committees a Director can serve on• Corporate Governance Report to be included in Annual Report• CSR guidelines also need to be adhered to by companies
    • • Dr. Parmjit Kaur, Dr. Suveera Gill; “The effects of ownership structure on corporate governance and performance”; NFCG; 2007-08• K. S. Chalapatan Rao, Atulan Guha; “Ownership Structure of the Indian Corporate Sector-Implications on Corporate Governance”; ISID; 2006• Jayesh Kumar; “Capital Structure & Corporate Governance”; XIMB; 2004• Pitabas Mohanty; “Institutional Investors and Corporate Governance”; NSE; 2006
    • • Rakesh Pandey,Dennis Taylor, Mahesh Joshi; “Governance of Large Family Companies in India: Effects on Financial Performance”; RMIT University,Australia• Lawrence Brown, Marcus Caylor; “Corporate Governance and Firm Performance”; USA; 2003• Chen, Nowland; “Family Involvement and Firm Performance in Taiwan”; Australia & HongKong; 2007• Bernard Black, Woocham Kim, Husang Jan; “How corporate governance affects firm value, in South Korea”; 2010• Maria Navarro, Silvia Anson, Laura Garcia; “Family Ownership and Control, other large shareholders and firm performance”; Spain; 2008• Habbershon T, Williams M; “Understanding Competitiveness of Family Controlled Companies”; England; 2000
    • • Impact of Ownership on Performance depends on: • Distribution of Ownership • Types of Large Shareholders(Promoter & Institutional)
    • HIGHER Promoter Holding BETTER Performance Firm Value INCREASES Agency Problems DECREASE BUT this can result in INCREASE of self-seeking behavior by PromotersHigher Promoter Holdings Lower chances of any hostile takeovers or other acquisition threat. Thus INTERNAL CONTROL MECHANISM should be highly effective and efficient.
    • • Board Independence • Independent Directors are introduced in a Company’s Board of Directors to monitor the effectiveness of the Board. • Greater the independence of the independent directors = Better Corporate Governance = Better Financial Performance• Board Size(Lange,2000) • Smaller board size is generally recommended to ensure higher efficiency. • Smaller size allows for bringing in directors of proven expertise and extensive knowledge of the domain, thereby reducing extra cost of maintaining a larger board size. • We have used this theory but it has been disproved in Europe by Bonn,2004
    • • Higher foreign funds were provided to companies with: • Large Market Capitalization • Higher Dividend Yield • Higher Leverage• FII tends to be more in companies with: • Lower family controlled stakes • Those which are closely tied to the local financial institutions and corporates• Higher P/E ratio tends to bring in more FII• Higher FII = Lower Promoter Holding = Higher Public Holding
    • • Better Corporate Governance=Higher Mutual Fund Investment, but reverse is not true• Better Corporate Governance=Higher Financial institutions Investment, but reverse is not true• Institutional Investors should not meddle with management which is out of their core interest which is to follow their own investment objectives(Wharton, Losch, Hansson-1991)• Absence of appropriate incentives and free-rider problems hinder institutional activism (Klein, 1994)• Better Corporate Governance=Better Stock Performance(Mohanty, 1998)• Poor Corporate Governance=Firm Value Decline, due to INFORMATION ASYMMETRY and HIGHER Agency Costs
    • • Most of the studies made are for developed economies • Studies made in this respect in India is few which made us go through more of the studies relevant developed economies• Previous studies are highly generic in nature. Specific studies for different industries have not been carried out much • Have carried out both Qualitative and Quantitative Analysis to try and bridge this gap• We found no specific marker regarding shareholding pattern affecting any of the financial indicators among RoE, EPS and DPR • Have carried out Quantitative Analysis to bridge this gap
    • • Institutional Investor Share has increased by 8% • Indicating greater confidence in governance• FII holdings has increased by 8% • Indicating greater information symmetry • Cash Reserves have gone up which is in congruence (Dahlquist, 2003)• Zero debt => Strong governance mechanism(Jayesh Kumar,2006)
    • • Mutual Funds: Decreased in both• Financial Institutions: Constant in Infosys; Increased in TCS by 300%• Stock Prices: Decreased for Infosys; Increased for TCS• Debt Levels: Infosys=ZERO; Increased for TCS• FII: Increased for both; Infosys(8.5%); TCS(11.5%)• P/E Ratio: Higher for TCS v/s Infosys• Quick Ratio: Infosys(4) v/s TCS(2)
    • Company Non- Non- Non- Executive Executive Executive Executive Whole-time Independent Non- Whole-time Independent Independent Infosys 8 2 - 5 TCS 6 - 4 1Analysis:• More Independent Directors in Infosys => higher independency => better control => better corporate governance• Board size of TCS (11) is smaller than Infosys (15)• Both have had 5 board meetings in the last year
    • • Promoter shareholding has decreased by 1.12% • Not a major impact w.r.t takeover• Institutional Investor Share has increased by 5% • Indicates higher confidence in governance due to better financial performance• FII holdings has increased by 13% • Implies high level of information symmetry• Non-Institutional shareholding remained nearly constant • Not much change in confidence in retail investment space
    • • Mutual Funds: Decreased for HDFC; Constant for ICICI• Financial Institutions: Decreased for both: HDFC (33%), ICICI (65%)• Stock Prices: Increase for HDFC & Decrease for ICICI• Debt Levels: Increased for both: HDFC (21%), ICICI (18%)• FII: Increased for both: HDFC (13%), ICICI (6%)• P/E Ratio: HDFC (13.5%) is higher than ICICI (6.7%)• Quick Ratio: HDFC – 6.2, ICICI - 16
    • Company Non- Non- Non- Executive Executive Executive Executive Whole-time Independent Non- Whole-time Independent Independent HDFC 5 1 - 4 ICICI 8 - 1 3Analysis:• More Independent Directors in ICICI => higher independency => better control => better corporate governance• Board size of HDFC (10) is smaller than ICICI (12)• Both have had 5 board meetings in the last year• ICICI was setup in 1954 while HDFC in 1994 • ICICI has better financial performance due to Age
    • • Promoter shareholding has increased by 2.09% • Not a major impact w.r.t takeover• Institutional Investor Share has increased by 2.5% • Indicates higher confidence in governance due to better financial performance• FII holdings has increased by 14.7% • Implies high level of information symmetry• Non-Institutional shareholding has decreased by 6% • Indicates lower confidence in governance in retail investment space
    • • Mutual Funds: Decreased for both• Financial Institutions: Decrease for Tata Steel (11%); Increase for SAIL (39%)• Stock Prices: Decreased for both – Tata Steel (20%), SAIL (40%)• Debt Levels: Decreased for both – Tata Steel (16%), SAIL (20%)• FII: Increased for both – Tata Steel (14%), SAIL (16%)• P/E Ratio: SAIL has higher than Tata Steel• Quick Ratio: Tata Steel – 0.52; SAIL – 0.82• Current Ratio: Tata Steel – 0.79; SAIL – 1.22
    • Company Non- Non- Non- Executive Executive Executive Executive Whole-time Independent Non- Whole-time Independent IndependentTata Steel 6 5 - 1 SAIL 9 - 2 5Analysis:• More Independent Directors in SAIL => higher independency => better control => better corporate governance• Board size of Tata Steel (12) is smaller than SAIL (16)• Both have had 5 board meetings in the last
    • • Institutional Investor Share has increased by 2.04% • Indicates higher confidence in governance due to better financial performance• FII holdings increased by 19.5% • Implies high level of information symmetry• Non-Institutional shareholding has decreased by 8.3% • Indicates lower confidence in governance in retail investment space
    • • Mutual Funds: Increased for Maruti Suzuki (25%); Decreased for M&M (45%)• Financial Institutions: Decreased for both – Maruti Suzuki (26%), M&M (20%)• Stock Prices: Increased for both - Higher for Maruti Suzuki (13.5%)• Debt Levels: Increased for both – Maruti Suzuki (249%), M&M (32%)• FII: Increased for both – Maruti Suzuki (20%), M&M (25%)• P/E Ratio: Maruti Suzuki is higher than M&M• Quick Ratio: Maruti Suzuki – 0.89 (22% down); M&M – 0.66 (8% up)• Current Ratio : Maruti Suzuki – 1.02 (30% down); M&M –
    • Company Non- Non- Non- Executive Executive Executive Executive Whole-time Independent Non- Whole-time Independent IndependentMaruti Suzuki 3 4 - 4 M&M 10 - 2 2 Analysis: • More Independent Directors in M&M => higher independency => better control => better corporate governance • Board size of Maruti Suzuki (11) is smaller than M&M (14) • Both have had 5 board meetings in the last
    • • No single owner controlling the company• Institutional Investor Share has increased by 3.5% • Indicates higher confidence in governance due to better financial performance• FII holdings increased by 20.9% • Implies high level of information symmetry• Non-Institutional shareholding has decreased by 4.6% • Indicates lower confidence in governance in retail investment space
    • • Mutual Funds: Increased for L&T (5.3%); Decreased for BHEL (82.3%)• Financial Institutions: Decreased for L&T (9%); Increased for BHEL (352%)• Stock Prices: Decreased for both – L&T (10%); BHEL (26%)• Debt Levels: Increased for L&T (38%); Decreased for BHEL (24.5%)• FII: Increased for both – L&T (20.9%); BHEL (22%)• P/E Ratio: L&T has higher than BHEL• Quick Ratio: L&T – 1.26; BHEL – 1.11• Current Ratio: L&T – 1.2; BHEL – 1.47
    • Company Non-Executive Non-Executive Executive Independent Non- Whole-time Independent L&T 7 (including - 7 Chairman) BHEL 7 2 5 (including Chairman)Analysis:• More Independent Directors in BHEL => higher independency => better control => better corporate governance• Board size of both companies is same (14)• Both have had 5 board meetings in the last year
    • • Institutional Investor Share has decreased by 0.9% • Unable to instill greater satisfaction among investors• FII holdings decreased by 1.37% • Indicates lower level of information symmetry• Non-Institutional shareholding increased by 3.96% • Indicates higher confidence in governance in retail investment space
    • • Mutual Funds: Decreased for Airtel (17.6%); Increased for Tata Comm. (30%)• Financial Institutions: Increased for both – Airtel (40%); Tata Comm. (654%)• Stock Prices: Decreased for both – Airtel (6%); Tata Comm. (5%)• Debt Levels: Increased for Airtel (18%); Decreased for Tata Comm. (57%)• FII: Decreased for Airtel (1.7%); Increased for Tata Comm. (79.8%)• P/E Ratio: Higher for Tata Comm. than Airtel• Quick Ratio: Airtel – 1.27 (64% up); Tata Comm. – 1.32 (34% down)• Current Ratio: Airtel – 1.01 (45% up); Tata Comm. – 1.34 (30%
    • Company Non- Non- Non- Executive Executive Executive Executive Whole-time Independent Non- Whole-time Independent Independent Airtel 7 4 - 3Tata Comm. 3 - 7 1Analysis:• More Independent Directors in Airtel => higher independency => better control => better corporate governance• Board size of Airtel (14) is higher than Tata Comm. (11)• Both have had 5 board meetings in the last year
    • • Input Variables: • Market Capitalization of Firm • Beta • Promoters’ Stake• Hypotheses: • H0: There is significant relationship between Market Capitalization of Firm, Beta, Promoters’ Stake and Return on Equity • H1: There is significant relationship between Market Capitalization of Firm, Beta, Promoters’ Stake and Dividend Payout Ratio • H2: There is significant relationship between Market Capitalization of Firm, Beta, Promoters’ Stake and Earnings per Share• Multivariate Linear Regression was carried out on the average of the data of past 5 years
    • • The results for H0 indicate that the alternate hypothesis is true• The results for H1 indicate that the null hypothesis is true • Highest correlation is with Beta • Shareholding pattern doesn’t impact financial performance significantly• The results for H2 indicate that the alternate hypothesis is true• Thus, in IT industry, only DPR is impacted by shareholding pattern• Regression Analysis • CF_Regression_Excel FilesIT.xlsx
    • • The results for H0 indicate that the hypothesis is valid but there is very low correlation• The results for H1 indicate that the hypothesis is valid and there is very high correlation • Highest correlation is with Beta • Shareholding pattern doesn’t impact financial performance significantly• The results for H2 indicate that the alternate hypothesis is true• Thus, in BFSI industry, ROE & DPR are impacted by shareholding pattern• Regression Analysis: • CF_Regression_Excel FilesBFSI.xlsx
    • • The results for H0 indicate that the hypothesis is valid and there is very high correlation• The results for H1 indicate that the alternate hypothesis is true• The results for H2 indicate that the alternate hypothesis is true• Thus, in Steel industry, only ROE is impacted by shareholding pattern• Regression Analysis • CF_Regression_Excel FilesSteel.xlsx
    • • The results for H0 indicate that the alternate hypothesis is true• The results for H1 indicate that the alternate hypothesis is true• The results for H2 indicate that the alternate hypothesis is true• Thus, in Automobile industry, none of the performance indicators are impacted by shareholding pattern• Regression Analysis • CF_Regression_Excel FilesAutomobile.xlsx
    • • The results for H0 indicate that the null hypothesis is true• The results for H1 indicate that the alternate hypothesis is true• The results for H2 indicate that the alternate hypothesis is true• Thus, in Power industry, only ROE is impacted by shareholding pattern• Regression Analysis • CF_Regression_Excel FilesPower.xlsx
    • • The results for H0 indicate that the alternate hypothesis is true• The results for H1 indicate that the null hypothesis is true• The results for H2 indicate that the alternate hypothesis is true• Thus, in Telecom industry, only DPR is impacted by shareholding pattern• Regression Analysis • CF_Regression_Excel FilesTelecom.xlsx
    • • No single parameter to determine whether a corporate governance structure is strong or weak• Qualitatively, it may be the age or the past performance of the stock which may induce investors• Quantitatively, it can be any parameter from among RoE, EPS or DPR that an investor looks at while investing• Changes in the investment preferences can affect the ownership structure, which in turn affects the firm’s corporate governance and in turn, the financial performance