CHAPTER IV
INSTITUTIONAL HOLDINGS AND CORPORATE GOVERNANCE

As noted earlier, the need for corporate governance arises from the potential conflicts of interest among participants (stakeholders) in corporate structure. These are often referred as agency problems arise from two main sources. First, different participants have different goals and preferences. Second, the participants have imperfect information as to each other's actions, knowledge and preferences. Berle and Means (1932) addressed these conflicts by examining the separation of ownership and control. They noted that this separation, in the absence of other corporate governance mechanisms, provide executives with the ability to act in their own self-interest rather than in the interest of shareholders. However, executives' activities are potentially constrained by numerous factors that constitute and influence the governance of the corporations that they manage. These factors can be thought of as either internal control mechanisms (such as the board) or external control mechanisms (such as the market for corporate control). An increasingly important external control mechanism affecting governance worldwide is the emergence of institutional investors as equity owners.

Although institutional investors are the predominant players in some countries' financial markets and are therefore important in corporate governance, yet the ownership

structures and other governance characteristics differ across markets. These differences are attributable in part to legal and regulatory systems and in part to the manner in which the markets have evolved. These characteristics will continue to vary across countries, leading to differences in the role and influences of institutional investors in corporate governance. Previous researchers have shown that because of the costs involved, only large shareholders have the incentive to provide extensive monitoring of management.

Whether institutions as large shareholders should, or will, provide such monitoring depends in part on the constraints to which they are subjected, their objectives, and their preferences for liquidity.

Keeping the above into consideration, it is pertinent to examine the intricacies of institutional holdings in the governance matters of Indian corporates. Many a time, institutional holdings pre-empts good corporate governance still at other times, good corporate governance endues institutional investment in the firm. The ongoing debate as to the institutional holdings and the corporate governance is very live or interactive in the academics these days too. The results of earlier studies are inconclusive as to the deterministic value of the one or the other. In the present study, Corporate Governance Score index has been developed on the basis of key characteristics of Standard and Poor's Transparency and Disclosure Benchmark to rate sampled firms in terms of corporate governance. The institutional holdings in terms of equity investment has been expressed in percentages to total investment and comparatively, in terms of the relative composition of the institutional equity investment. This chapter makes a detailed analysis of the dynamics of corporate governance and the institutional holdings in the following three perspectives:

4.1) Dynamics of institutional holdings and its composition

4.2) Relationship between Institutional Holdings (explanatory variable) and the Corporate Governance (dependent variable)

4.3) Relationship between the Corporate Governance (explanatory variable) and Institutional Holdings (dependent variable)

The results obtained for the sampled in this regard are reported, in an analytical frame, here as under:

4.1.1) Status of Institutional Holdings:

The results obtained for sampled companies as regard to the status of institutional holdings in the sampled companies during the study period 2004-08 are summarized in table no. 4.1 given below:

Table 4.1

Institutional Holdings in the Sampled Companies

Institutional

Holdings

(%)

Number of Companies

2004

N (%)

2005

N (%)

2006

N (%)

2007

N (%)

2008

N (%)

Below 5

61

30.5

53

26.5

46

23.0

46

23.0

47

23.5

5-10

34

17.0

31

15.5

30

15.0

26

13.0

27

13.5

10-15

30

15.0

34

17.0

22

11.0

25

12.5

22

11.0

15-26

37

18.5

40

20.0

43

21.5

43

21.5

42

21.0

26-50

36

18.0

38

19.0

54

27.0

55

27.5

55

27.5

Above 50

02

1.0

04

2.0

05

2.5

05

2.5

07

3.5

Total

200

100

200

100

200

100

200

100

200

100

The information inputs reported in the present table reveals that the proportions of institutional holdings in the sampled companies have increased over the years. The numbers of companies with larger proportions of institutional holdings have been increasing and the numbers of companies with smaller proportions of holdings have been declining over the study period. As institutions have above 50 percent holdings in only 1 percent companies in 2004, where as in the last year of the study period, it increased to 3.5 percent. Similarly, institutions have holdings from 26 to 50 percent in 18 percent companies in 2004 that rises to 27.5 percent companies in 2008. The same trend

follows for the companies in which institutions have holdings from 15 to 26 percent. The decreasing number of companies with relatively lower institutional holdings also validates it. As institutions have less than 5 percent stake in 30.5 percent companies in 2004, which reduced to only 23.5 percent companies in 2008. Similarly, institutions have holdings up to 10 percent in 17 percent companies that reduced to 13.5 percent in the last year of the study period. Thus, it is observed that institutional investors have been increasing their stake in the sampled companies over the study period. Hence, it is inferred that institutional investors have been consistently getting more interested in the sampled companies over the study period.

4.1.2 Constituents of Institutional Holdings:

As noted earlier, Institutional holdings have been further classified into three categories i.e., Mutual Fund, (Banks, Financial Institutions and Insurance Companies) and Foreign Institutional Investors.

The results obtained for the sampled companies as regard to the status of Mutual Funds holdings in relation to the total shareholdings and to the total institutional investors in the sampled companies during the study period 2004-08 are summarized in part (a) and part (b) of the table no. 4.2 given below:

Table 4.2 (a)

MF Holdings in Relation To Total Shareholdings

Mutual Fund

Holdings (%)

Number of Companies

2004

N (%)

2005

N (%)

2006

N (%)

2007

N (%)

2008

N (%)

Below 5

140

70.0

143

71.5

117

58.5

113

56.5

119

59.5

5-10

42

21.0

34

17.0

52

26.0

54

27.0

41

20.5

10-15

14

7.0

14

7.0

22

11.0

23

11.5

29

14.5

15-20

03

1.5

07

3.5

07

3.5

07

3.5

07

3.5

Above 20

01

0.5

02

1.0

02

1.0

03

1.5

04

2.0

Total

200

100

200

100

200

100

200

100

200

100

Table 4.2 (b)

MF Holdings in Relation to Total Institutional Holdings

Mutual Funds

Holdings (%)

Number of Companies

2004

N (%)

2005

N (%)

2006

N (%)

2007

N (%)

2008

N (%)

0-20

96

48.0

104

52.0

100

50.0

103

51.5

101

50.5

20-40

55

27.5

38

19.0

41

20.5

50

25.0

47

23.5

40-60

22

11.0

21

10.5

24

12.0

14

7.0

23

11.5

60-80

09

4.5

18

9.0

19

9.5

16

8.0

17

8.5

Above 80

18

9.0

19

9.5

16

8.0

17

8.5

12

6.0

Total

200

100

200

100

200

100

200

100

200

100

The information inputs reported in part (a) of the present table depict that mutual funds have increased their proportions of shareholdings in relation to the total shareholdings over the study period. The number of sampled companies with higher proportions of mutual funds holdings has been increasing over the study period. Similarly, the number of sampled companies with lower proportions of mutual funds holdings has been decreasing over the same period. As mutual funds have more than 20 percent holdings in 0.5 percent companies in 2004, which increased to 2 percent companies at the end of the study period. Similarly, Mutual Funds have holdings to the extent of 20 percent only in 1.5 percent companies in 2004 that increased to 3.5 percent companies in 2008. It is also observed that there were only 14 companies in 2004 in which mutual funds holdings were from 10 to 15 percent, which increased to more than double at the end of the study period. It is also validated by the observations of the companies in which mutual funds have lower stake. There were 70 percent companies in which mutual funds had less than 5 percent holdings and the proportion of companies with such holdings reduced to 59.5 percent in 2008. Hence, it is inferred that mutual fund companies have become more interested in the sampled companies over the study period.

The information inputs reported in part (b) of the present table reveal out that there is no consistency in the investment pattern of mutual funds in the sampled companies over the study period. Mutual fund holdings in relation to total institutional holdings have remained more or less between zero and 20 percent in about 50 percent companies. On an average in 23 percent companies, mutual funds hold 20 to 40 percent shares. Mutual Funds reduced their holdings in 20 to 40 percent category in sampled companies over the study period. Where as there has not been major change in the number of companies with 40 to 60 percent mutual fund holdings. On the other hand, mutual funds have increased their stake from 60 to 80 percent in sampled companies over the study period. There are 9 companies with such holdings, which increased to 17 companies in 2008. But the number of sampled companies with mutual funds holdings more than 80 percent has gone down over the study period. As in 2004, there are 9 percent companies that reduced to 6 percent at the end of the study period. Hence, no inference can be drawn about the investment behaviour of mutual funds in relation to the total institutional holdings in sampled companies over the study period.

The results obtained for sampled companies as regard to the status of Banks, FIs and ICs holdings in relation to the total shareholdings and total institutional holdings in the sampled companies during the study period 2004-08 are summarized in part (a) and part (b) of the table no. 4.3 given below:

Table 4.3 (a)

Banks, FIs and ICs Holdings in Relation To Total Shareholdings

Bank, FI and IC Holdings (%)

Number of Companies

2004

N (%)

2005

N (%)

2006

N (%)

2007

N (%)

2008

N (%)

Below 5

127

63.5

135

67.5

142

71.0

139

69.5

141

70.5

5-10

36

18.0

28

14.0

27

13.5

34

17.0

29

14.5

10-15

19

9.5

24

12.0

19

9.5

18

9.0

18

9.0

15-20

09

4.5

08

4.0

07

3.5

04

2.0

08

4.0

Above 20

09

4.5

05

2.5

05

2.5

05

2.5

04

2.0

Total

200

100

200

100

200

100

200

100

200

100

Table 4.3 (b)

Banks, FIs and ICs Holdings in Relation to Total Institutional Holdings

Banks, FIs and ICs Holdings (%)

Number of Companies

2004

N (%)

2005

N (%)

2006

N (%)

2007

N (%)

2008

N (%)

0-20

70

35.0

90

45.0

103

51.5

99

49.5

99

49.5

20-40

34

17.0

34

17.0

41

20.5

41

20.5

34

17.0

40-60

29

14.5

30

15.0

16

8.0

23

11.5

37

18.5

60-80

21

10.5

13

6.5

17

8.5

15

7.5

08

4.0

Above 80

46

23.0

33

16.5

23

11.5

22

11.0

22

11.0

Total

200

100

200

100

200

100

200

100

200

100

The information inputs reported in the part (a) of the present table depicts that the proportions of Banks, Financial Institutions and Insurance Companies in the sampled companies have decreased over the years. The numbers of companies with lower proportions of these holdings have been increasing and the numbers of companies with higher proportions of holdings have been decreasing over the study period. As in 63.5 percent companies, Banks and others hold less than 5 percent shares in 2004 while in 2008, 70.5 percent companies have the same holdings reflecting that over the study period, the above category of institutional investors have shown less interest in the sampled companies. Similarly, Banks and others hold up to 10 percent of total shareholdings in 36 companies which reduced to 27 in the year 2006 and finally to 29 companies in the year 2008. Likewise, the number of companies with more than 20 percent holdings has reduced from 4.5 percent in 2004 to 2 percent in 2008. Thus, it is observed that Banks, FIs and ICs have withdrawn their substantial holdings in some companies while number of companies with marginal holdings has increased. Hence, it is inferred that Banks, FIs and ICs are getting less interested in the sampled companies over the study period.

The information inputs reported in the part (b) of the present table depict the results coherent with the results shown in part (a) as Banks, Financial Institutions and Insurance Companies have decreased their holdings in relation to total institutional holdings in the sampled companies over the study period as well. They have more than 80 percent holdings in 23 percent companies in 2004 but in the last year of the study period, it was just in 11 percent companies. Similarly, these investors had 60 to 80 percent holdings in 21 companies in 2004, but in 2008, the number of companies with such holdings reduced to only 8 companies. The same is validated by the proportional increase in the number of companies with relatively lower holdings. Banks and others held to the limit of 20 percent shares in 70 companies in 2004 and in 2008, the number of companies with such holdings rose to 99. These investors have shown more interest in increasing their holdings from 40 percent to 60 percent in the sampled companies over the study period as they had such holdings in 14.5 percent companies in 2004 that increased to 18.5 percent in the last year of the study period. Thus, it is observed that the above-mentioned investors are gradually reducing their stakes to the lower levels in proportion to total institutional holdings in the sampled companies over the study period. Hence, it is inferred that Banks, FIs and ICs have been loosing interest in the sampled companies.

The results obtained for sampled companies as regard to the status of FII holdings in relation to the total shareholdings and to the total institutional investors in the sampled companies during the study period 2004-08 are summarized in part (a) and part (b) of the table no. 4.4 given below:

Table 4.4 (a)

FII Holdings in Relation To Total Shareholdings

FII Holdings

(%)

Number of Companies

2004

N (%)

2005

N (%)

2006

N (%)

2007

N (%)

2008

N (%)

Below 5

133

66.5

114

57.0

103

51.5

100

50.0

92

46.0

5-10

29

14.5

30

15.0

24

12.0

24

12.0

36

18.0

10-15

17

8.5

22

11.0

23

11.5

23

11.5

26

13.0

15-20

09

4.5

13

6.5

15

7.5

25

12.5

18

9.0

20-26

12

6.0

21

10.5

35

17.5

28

14.0

28

14.0

Total

200

100

200

100

200

100

200

100

200

100

Table 4.4 (b)

FII Holdings in Relation to Total Institutional Holdings

FII Holdings

(%)

Number of Companies

2004

N (%)

2005

N (%)

2006

N (%)

2007

N (%)

2008

N (%)

0-20

115

57.5

83

41.5

74

37.0

69

34.5

62

31.0

20-40

20

10.0

35

17.5

33

16.5

28

14.0

39

19.5

40-60

29

14.5

36

18.0

33

16.5

34

17.0

43

21.5

60-80

23

11.5

25

12.5

35

17.5

40

20.0

33

16.5

Above 80

13

6.5

21

10.5

25

12.5

29

14.5

23

11.5

Total

200

100

200

100

200

100

200

100

200

100

The information inputs reported in the part (a) of the present table reveals that the proportions of FII holdings in relation to total shareholdings in the sampled companies have increased over the years. The numbers of companies with higher proportions of FII holdings have been increasing and the numbers of companies with smaller proportions have been decreasing over the study period. As FIIs have 20 to 26 percent holdings in only 6 percent companies in 2004, where as in the last year of the study period, it increased to 14 percent. Similarly, FIIs have holdings from 15 to 20 percent in 9 companies in 2004 that got doubled to 18 companies in 2008. The same trend follows for the companies with FII holdings from 10 to 15 percent. FIIs had such holdings in 17 companies only in 2004 but in the last year of the study period, it increased to 26 companies. The decreasing number of companies with relatively lower FII holdings also validates it. In nutshell, the FIIs have been consistently increasing their stake in relation to the total shareholdings in the sampled companies over the study period. Hence, it is inferred that institutional investors have been consistently getting more interested in the sampled companies over the study period.

The information inputs reported in the part (b) of the present table also depict results consistent with the results shown for part (a). The proportion of FII holdings in relation to the institutional holdings in the sampled companies has also increased over the years. As institutions had above 80 percent holdings in only 6.5 percent companies in 2004, where as in the last year of the study period, it increased to 11.5 percent companies. Similarly, FIIs had holdings from 60 to 80 percent in 23 companies in 2004 that increased to 33 companies in 2008. The same trend follows for the companies with FII holdings from 40 to 60 percent. The decreasing number of companies with relatively lower FII holdings also validates it. As FIIs have less than 20 percent stake in 57.5 percent companies in 2004 which reduced to only 31 percent companies in 2008. Hence, it is inferred that FIIs have shown more interest in the sampled companies over the study period.

Resume

It can be observed from the result outputs of the first section that the institutional investors have increased their proportional holdings in the companies over the years. The number of sampled companies is consistently increasing with higher institutional holdings where as the number of companies are decreasing with lower proportions of institutional holdings. The mutual fund investors have also increased their holdings in relation to the total shareholdings over the study period. The number of companies with higher mutual fund holdings has been increasing over the years. Similarly, the number of companies with lower mutual fund holdings has been decreasing over the study period. But the results of observations of mutual fund holdings in relation to total institutional holdings state otherwise. Mutual funds have increased their proportions of holdings to the total shareholdings in the sampled companies over the study period but it is not so in relation to the total institutional holdings. Therefore, the investment pattern of mutual funds is not clear. Where as Banks, Financial Institutions and Insurance Companies have decreased their proportional holdings in the sampled companies over the study period. There has been decline in the number of sampled companies with higher proportion of the Banks, FIs and ICs holdings. Validating the same, the numbers of companies with lower proportion of above holdings have been increasing over the study period. The results are consistent for the proportion of Banks, FIs and ICs in relation to total institutional holdings as well. To the contrary, foreign institutional investors have increased their proportional holdings in the sampled companies over the years. The number of companies is increasing with higher FII holdings and the number of companies is decreasing with lower proportion of FII holdings. The results are similar in relation to the total institutional holdings as well. Hence, at the end of the section it is inferred on the basis of result outputs that institutional investors in total and foreign institutional investors are getting more interested in the sampled companies over the study period. Banks, financial institutions and insurance companies are getting less interested in the same companies over the study period. And the results are inconclusive for the mutual funds.

4.2.1 Status of Corporate Governance Score in Sampled Companies:

The Corporate Governance status of sampled companies is depicted in table 4.5. Total sampled of 200 companies has been divided into four quartiles of 50 companies each. The first quartile shows the company codes with highest corporate governance scores with in the range of 58 to 76 with the average score of 62.5. The second quartile shows the company codes with higher corporate governance scores with in the range of 52 to 58 with the average score of 54.3. The third quartile shows the company codes with lower corporate governance scores with in the range of 46 to 52 with the average score of 48.7.

The fourth quartile shows the company codes with lowest corporate governance scores with in the range of 26 to 46 with the average score of 40.04.

Table 4.5

Status of Corporate Governance in Sampled Companies

Sampled Companies

Number of Companies

Sampled Company (Code)

Range

Average

Governance

Score

Q1

50

2,5,6,11,13,15,21,26,27,28,29,37,39,

41,42,47,48,53,56,68,69,71,72,75,76,7778,79,84,86,88,91,93,96,97,98,102,

104,106,119,124,132,135,147,171,173180,189,194,198

58-76

62.5

Q2

50

10,17,18,30,31,33,34,36,38,45,46,52,

54,55,57,58,60,61,62,63,64,65,80,85,

100,101,103,108,117,118,121,125,

134,142,149,150,156,160,167,170,

175,177,179,183,184,185,186,187,

190,197

52-58

54.3

Q3

50

1,3,4,9,14,16,19,20,23,40,43,44,50,

59,66,70,73,74,82,83,92,94,99,105,

107,109,110,113,115,120,123,123,

127,129,130,137,139,151,152,154,

155,162,163,165,169,182,188,192,

196,200

46-52

48.7

Q4

50

7,8,12,22,24,25,32,35,49,51,81,87,

89,90,95,111,112,114,116,122,126,

128,131,133,136,138,140,141,143,

144,145,146,148,153,157,158,159,

161,164,166,168,172,174,176,178,

181,191,193,195,199

26-46

40.04

4.2.2 Relationship between institutional holdings and corporate governance:

The results obtained in this regard are reported in an analytical frame in table no. 4.6 as under:

Part (a) of the present study table reveals out the (%) institutional holdings along with corporate governance score for the study period 2004-08. Part (b) of the table depicts the regression parameters as regard to institutional holdings and corporate governance score

Table 4.6 (a)

Institutional Holdings and Corporate Governance

Institutional Holdings

(%)

Corporate Governance Score

2004

2005

2006

2007

2008

N

Average

N

Average

N

Average

N

Average

N

Average

0-10

95

47.84

84

47.44

76

46.74

72

47.06

74

47.42

10-25

64

53.50

70

52.79

62

52.21

63

51.44

60

51.53

25-50

39

56.51

42

56.43

57

56.32

60

56.37

59

55.80

Above50

02

50.50

04

56.00

05

55.00

05

52.60

07

54.43

200

200

200

200

200

Table 4.6 (b)

Institutional Holdings and Corporate Governance

Institutional

Holdings

(%)

Corporate Governance Score

2004

2005

2006

2007

2008

Constant

47.18

46.98

46.64

46.64

47.05

b Value

0.43

0.43

0.43

0.43

0.40

SE

0.84

0.86

0.91

0.91

0.91

R2

0.19

0.19

0.18

0.18

0.16

t-value

6.75*

6.73*

6.63*

6.63*

6.21*

D/W

1.825

.825

1.868

1.84

1.78

Predictor: Institutional Holdings; Dependent Variable: Corporate Governance Score

*Significant at 5 percent level

The information inputs reported in part (a) of the present table reveals out that the larger proportions of institutional holdings (to the level of 50 percent) have higher corporate governance score in sampled companies over the study period. Similarly, the smaller proportions of institutional holdings have lower governance scores in the sampled companies over the study period. The sampled companies in which institutional holdings are from 25 to 50 percent have the average corporate governance score of 56.51 points in 2004, 56.32 points in 2006 and 55.80 points in 2008. These score points are highest in all the years. Where as lower governance scores are observed for lower proportions of institutional holdings. As the sampled companies in which institutional holdings are to the level of 10 percent have poor average governance scores. They are 47.84 score points in 2004, 46.74 score points in 2006 and 47.42 score points in 2008. Similarly, the sampled companies with 10 to 25 percent institutional holdings have higher corporate governance scores than the companies with lower holdings and lower governance scores than the companies with higher institutional holdings over the study period. It can be inferred from the above results that there is very strong and positive relationship between institutional holdings and Corporate Governance.

The statistical significance of these findings through regression analysis is reported in the part (b) of the present table. The parameters also validate the above inference, as the degree of dependence between two variables is higher over the study period. All the values are also considered significant (a=0.05) in terms of t-value over the study period. D/W value is near 2 in all the five years indicating the regression results are reliable.

4.2.3 Relationship between mutual funds holdings and corporate governance:

The results obtained in this regard are reported in an analytical frame in table no. 4.7 as under:

Part (a) of the present study table reveals out the (%) mutual funds holdings along with corporate governance score for the study period 2004-08. Part (b) of the table depicts the regression parameters as regard to mutual funds holdings and corporate governance score

Table 4.7 (a)

MF Holdings and Corporate Governance

Mutual Fund Holdings

Corporate Governance Score

2004

2005

2006

2007

2008

(%)

N

Average

N

Average

N

Average

N

Average

N

Average

0-5

140

50.5

143

51.0

117

50.9

113

50.6

119

50.3

5-10

42

51.8

34

50.9

52

52.0

54

52.5

41

53.6

10-15

14

55.2

14

54.2

22

51.4

23

52.4

29

52.0

Above15

04

57.8

09

54.8

09

54.0

10

51.0

11

52.6

200

200

200

200

200

Table 4.7 (b)

MF Holdings and Corporate Governance

Mutual Fund Holdings (%)

Governance Score

2004

2005

2006

2007

2008

Constant

49.32

50.07

50.32

50.48

50.27

b Value

0.27

0.18

0.12

0.10

0.14

SE

0.80

0.81

0.86

0.87

0.84

R2

0.07

0.03

0.02

0.01

0.02

t-value

3.97*

2.54*

1.78

1.49

1.98

D/W

1.96

1.92

1.90

1.85

1.85

Predictor: MF Holdings; Dependent Variable: Corporate Governance Score

*Significant at 5 percent level

The information inputs reported in part (a) of the present table reveals out that larger proportions of mutual funds holdings have higher corporate governance score of sampled companies in first two years of the study period only. The sampled companies in which institutions have holdings more than 15 percent have highest average corporate governance score of 57.8 points in 2004. For the same category of mutual funds holdings, the average score is highest at 54.8 points in 2005. Similarly, the companies in which mutual funds have lowest holdings, the average corporate governance score is also lowest in these very years. Hence, it can be inferred that there is strong and positive relationship between mutual funds holdings and corporate governance scores in these years. But same inference cannot be drawn for the other years of the study period. In 2006, the companies with mutual funds holdings of 5 to 10 percent have average governance score is 52 points, which declined to 51.4 points in the higher mutual fund holding category. Similarly, the average governance score of sampled companies are relatively lower in which mutual funds have holdings more than 15 percent in 2007 too. In last year of the study period also, the relationship between both the variables is not clear. Hence, it can be inferred that weak relationship exists between mutual funds holdings and corporate governance.

The statistical significance of these observations through regression analysis is presented in the second part of the table. The regression parameters also show that weak relationship exists between mutual fund holdings and corporate governance as the degree of dependence is lower in all the years except for in 2004 and 2005. Similarly, values of only year 2004 and 2005 are considered significant (a=0.05) in terms of t-value. D/W value is near 2 in all the five years indicating the regression results are reliable.

4.2.4 Relationship between Banks, FIs and ICs holdings and corporate governance:

The results obtained in this regard are reported in an analytical frame in table no. 4.8 as under:

Part (a) of the present study table reveals out the (%) (Banks, FIs and ICs) holdings along with corporate governance score for the study period 2004-08. Part (b) of the table depicts the regression parameters as regard to (%) (Banks, FIs and ICs) holdings and corporate governance score

Table 4.8 (a)

Banks, FIs and ICs Holdings and Corporate Governance

Bank, FIs and ICs Holdings

(%)

Corporate Governance Score

2004

2005

2006

2007

2008

N

Average

N

Average

N

Average

N

Average

N

Average

0-5

127

49.8

135

49.7

142

49.9

139

49.7

141

49.8

5-10

36

53.5

28

54.1

27

55.4

34

54.6

29

53.9

10-15

19

55.2

24

55.9

19

54.4

18

55.2

18

58.1

Above15

18

53.8

13

54.5

12

54.8

09

57.0

12

53.4

Total

200

200

200

200

200

Table 4.8 (b)

Banks, FIs and ICs Holdings and Corporate Governance

Bank, FIs and IC Holdings (%)

Corporate Governance Score

2004

2005

2006

2007

2008

Constant

49.93

49.76

49.77

49.34

49.29

b Value

0.21

0.23

0.23

0.29

0.30

SE

0.79

0.78

0.78

0.77

0.77

R2

0.04

0.05

0.05

0.09

0.09

t-value

2.96*

3.39*

3.37*

4.33*

4.35*

D/W

1.77

1.78

1.78

1.78

1.76

Predictor: Banks, FIs and ICs Holdings; Dependent Variable: Governance Score

*Significant at 5 percent level

The information inputs reported in part (a) of the present table reveals out that the larger proportion of Banks, FIs and ICs holdings (to the level of 15 percent) have higher corporate governance score in sampled companies in all the years of the study period. The sampled companies in which institutional holdings are from 10 to 15 percent have the average corporate governance score of 55.2 points in 2004, 54.4 points in 2006 and 58.1 points in 2008. Similarly, the sampled companies with Banks, Ifs and ICs holdings of 5 to 10 percent have average governance score of 53.5 points in 2004, 55.4 points in 2006 and 53.9 in 2008. To validate it further, lower governance scores are observed for lower proportion of this category of institutional holdings in sampled companies. As the sampled companies in which Banks, FIs and ICs holdings are to the level of 5 percent have poorest average governance scores. They are 49.8 score points in 2004, 49.9 score points in 2006 and 49.8 score points in 2008. To the contrary, the sampled companies with largest proportions of institutional holdings have average governance score of sampled companies is 53.8 points in 2004, 54.8 points in 2006 and 53.4 points which is much greater than of companies with smallest institutional holdings. It can be inferred from the above results that there is very strong and positive relationship between Banks, FIs and ICs holdings and Corporate Governance.

The statistical significance of these findings through regression analysis is reported in the part (b) of the present table. The parameters draw the same inference as drawn above since the degree of dependence between two variables is higher in all the years of the study period. All the values are considered significant (a=0.05) in terms of t-value over the study period. D/W value is near 2 in all the five years indicating the regression results are reliable.

4.2.5 Relationship between FII holdings and corporate governance:

The results obtained in this regard are reported in an analytical frame in table no. 4.9 as under:

Part (a) of the present study table reveals out the (%) FII Holdings along with corporate governance score for the study period 2004-08. Part (b) of the table depicts the regression parameters as regard to FII Holdings and corporate governance score

Table 4.9 (a)

FII Holdings and Corporate Governance

FII Holdings

(%)

Corporate Governance Score

2004

2005

2006

2007

2008

N

Average

N

Average

N

Average

N

Average

N

Average

0-5

133

49.2

114

48.4

103

47.9

100

48.6

92

48.1

5-10

29

53.2

30

53.4

24

52.3

24

48.7

36

50.7

10-15

17

57.1

22

53.8

23

55.4

23

55.6

26

55.8

Above15

21

58.0

34

58.1

50

56.3

53

56.1

46

56.0

Total

200

200

200

200

200

Table 4.9 (b)

FII Holdings and Corporate Governance

FII Holdings

(%)

Corporate Governance Score

2004

2005

2006

2007

2008

Constant

49.11

48.63

48.11

48.28

48.57

b Value

0.39

0.40

0.42

0.40

0.36

SE

0.69

0.73

0.76

0.77

0.78

R2

0.15

0.16

0.17

0.16

0.13

t-value

5.98*

6.15*

6.46*

6.07*

5.47*

D/W

1.81

1.80

1.83

1.86

1.80

Predictor: FII Holdings; Dependent Variable: Corporate Governance Score

*Significant at 5 percent level

The information inputs reported in part (a) of the present table reveals out that the larger proportions of FII holdings have higher corporate governance score in the sampled companies over the study period. The sampled companies in which FII holdings are above 15 percent have the average corporate governance score of 58 points in 2004, 56.3 points in 2006 and 56 points in 2008. These score points are highest in all the years. Similarly, the sampled companies in which FIIs have 10 to 15 percent holdings also have higher average governance scores. In 2004, the average governance score is 57.1 points for such category where as in 2006, it is 55.4 points and in the last year of the study period, it is 55.8 points. To validate it further, it is observed that the smaller proportion of FII holdings have lower governance scores in the sampled companies over the study period. As the sampled companies in which FII holdings are to the level of 5 percent have poorest average governance scores. They are 49.2 score points in 2004, 47.9 score points in 2006 and 48.1 score points in 2008. Likewise, the sampled companies with 5 to 10 percent FII holdings have poorer average governance score of 53.2 points in 2004, 52.3 points in 2006 and 50.7 points in 2008. It can be inferred from the above results that there exists very strong and positive relationship between FII holdings and Corporate Governance.

The statistical significance of these outcomes through regression analysis is reported in the part (b) of the present table. The parameters also validate the inferences drawn above, as the degree of dependence is higher in all the years. All the values are considered significant (a=0.05) in terms of t-value over the study period. D/W value is near 2 in all the five years indicating the regression results are reliable.

Resume

The result outputs of the second section state that very strong and positive relationship exists between institutional holdings and governance scores. The companies in which institutional investors have larger proportions of holdings have higher governance scores. Similarly, the corporates in which institutional investors have lower proportions of institutional holdings have lower governance scores. The result outputs for the relationship between first component of institutional holdings and corporate governance state that weak relationship exists between mutual funds holdings and governance score. There is poor evidence as to higher proportions of mutual funds holdings result in improved governance practices in corporates and lower proportions of the mutual funds holdings result in poor governance practices in companies. Whereas, the contrary results are observed for the second component of institutional holdings. Banks, FIs and ICs observe very strong and positive relationship with governance scores. The corporations with larger proportions of Banks, FIs and ICs have good governance practices and the companies with lower proportions show poor governance practices. The results observed for the third component are coherent with the results second component of institutional investors. Very strong and positive relationship is also observed between Foreign Institutional Investors and Corporate Governance. As the larger proportions of foreign institutional holdings show significantly higher governance scores and lower proportions of holdings show relatively poor governance scores. Hence, it is inferred that companies in which institutional investors have higher stake, observe better corporate governance practices than the companies with lower institutional stake. Likewise, the companies with higher stake of Banks, FIs, ICs and FIIs observe better governance practices than the companies with lower stake. But the alternate inference is drawn for mutual funds.

4.3.1 Relationship between corporate governance and institutional holdings:

The results obtained in this regard are reported in an analytical frame in table no. 4.10 as under:

Part (a) of the present study table reveals out the governance score along with the (%) institutional holdings for the study period 2004-08. Part (b) of the table depicts the regression parameters as regard to governance score and institutional holdings

Table 4.10 (a)

Corporate Governance and Institutional Holdings

(%) Institutional Holdings

2004

2005

2006

2007

2008

Governance

Score

Range

Aver

-age

Range

Aver

-age

Range

Aver

-age

Range

Aver-age

Range

Aver-age

58-76

(62.5)

0.1-51.8

27.7

0.2-64.5

25.1

0.2-50.5

26.9

1.1-49.8

27.7

4-51.6

27.8

52-57

(54.3)

.21-49.7

20.9

.04-53.7

15.2

.04-56.4

19.2

.03-53.4

19.7

.03-55.5

19.0

45-52

(48.7)

.03-54.6

12.2

0.2-54.8

13.1

.01-55.5

16.1

.03-55.6

16.2

.06-58

16.8

26-45

(40.0)

0-29.6

6.36

0-43.0

8.1

0-44

9.6

0-33.1

9.4

0-36.4

9.3

Table 4.10 (b)

Corporate Governance and Institutional Holdings

Governance

Score

(%) Institutional Holdings

2004

2005

2006

2007

2008

Constant

-17.44

-18.07

-17.48

-17.71

-17.02

b Value

0.43

0.43

0.43

0.43

0.40

SE

4.66

5.04

5.42

5.50

5.76

R2

0.19

0.19

0.18

0.18

0.16

t-value

6.75*

6.73*

6.63*

6.63*

6.21*

D/W

2.13

2.07

2.19

2.19

2.01

Predictor: Governance Score; Dependent Variable: Institutional Holdings

*Significant at 5 percent level

The information inputs reported in part (a) of the present table describe that sampled companies with higher governance score have larger proportions of institutional holdings and sampled companies with lower governance score have smaller proportions of institutional holdings over the study period. The sampled companies with highest average governance score of 62.5 score points have highest average institutional holdings over the study period. As it is 27.7 percent in 2004, 26.9 percent in 2006 and 27.8 percent in 2008. Similarly, sampled companies with higher average governance score of 54.3 score points have higher institutional holdings. It is 20.9 percent in 2004, 19.2 percent in 2006 and 19 percent at the end of the study period. To validate it more, it is observed that the sampled companies with lower average governance scores have lower average institutional holdings too. The sampled companies with the lowest average governance score of 40 points have lowest institutional holdings of 6.36 percent in 2004, 9.6 percent in 2006 and 9.34 percent in 2008. Similarly, lower institutional holdings have been observed for the companies with lower average governance scores over the study period. Thus, it can be inferred from the above results that there is very strong and positive relationship between Corporate Governance Score and Institutional Holdings.

The statistical significance of these findings through regression analysis is reported in the part (b) of the present table. It also depicts that Corporate Governance Score and Institutional Holdings are very strongly related in all the years as the degree of dependence in terms b value is higher in all the years. All the values are considered significant (a=0.05) in terms of t-value over the study period. D/W value is near 2 in all the five years indicating the regression results are reliable.

4.3.2 Relationship between corporate governance and mutual funds holdings:

The results obtained in this regard are reported in an analytical frame in table no. 4.11 as under:

Part (a) in the study table reveals out the governance score along with the (%) mutual funds holdings for the study period 2004-08. Part (b) of the table depicts the regression parameters as regard to governance score and mutual funds holdings

Table 4.11 (a)

Corporate Governance and MF Holdings

(%) MF Holdings

2004

2005

2006

2007

2008

Governance

Score

Range

Aver

-age

Range

Aver-age

Range

Aver

-age

Range

Aver-age

Range

Aver-age

58-76

(62.5)

0-22.0

4.7

.07-24.4

4.9

0-27.2

5.2

.17-20.8

5.1

0-20.9

5.8

52-57

(54.3)

0-16.0

4.4

0-16.2

4.6

0-16.3

5.8

0-17.6

6.6

0-22.9

6.5

45-52

(48.7)

0-18.6

3.6

0-18.1

4.0

0-19.6

5.0

0-22.1

4.6

0-32.1

4.4

26-45

(40.0)

0-9.6

1.5

0-12.6

2.2

0-12.9

3.2

0-20.3

3.6

0-16.2

3.5

Table 4.11 (b)

Corporate Governance and MF Holdings

Governance

Score

(%) MF Holdings

2004

2005

2006

2007

2008

Constant

-2.99

-0.93

1.14

1.82

0.53

b Value

0.27

0.18

0.12

0.10

0.14

SE

1.67

1.94

2.09

2.16

2.33

R2

0.07

0.03

0.02

0.01

0.02

t-value

3.97*

2.54*

1.78

1.49

1.98

D/W

2.10

1.85

1.95

2.02

2.19

Predictor: Governance Score; Dependent Variable: MF Holdings

*Significant at 5 percent level

The information inputs reported in part (a) of the present table reveals out that conclusive results are not obtained as to the association between Corporate Governance and Mutual Funds holdings. Higher governance scores have higher mutual funds holdings in the sampled companies in first two years of the study period only. The sampled companies in which the average governance score is highest have the highest institutional holdings of 4.7 percent in 2004. For the same category of mutual funds holdings, the average institutional holding is highest at 4.9 percent in 2005. Similarly, the companies in which average governance score is lowest, the average institutional holdings are also lowest in these very years. Hence, it can be inferred that there is strong and positive relationship between corporate governance scores and mutual funds holdings in these years. But same inference cannot be drawn for the other years of the study period. In 2006, the companies with moderate average governance score of 54.3 points have the highest mutual fund holdings of 5.8 percent. For the same category, the mutual funds holdings are highest at 6.6 percent in 2007 and 6.5 percent in 2008. Hence, it can be inferred that there exists weak relationship between corporate governance and mutual funds holdings.

The statistical significance of these observations through regression analysis is presented in the second part of the table. The regression parameters also validate the conclusion drawn on the basis of above table, as the value of b is lower in all the years over the study period except for in 2004 and 2005. Similarly, values of only year 2004 and 2005 are considered significant (a=0.05) in terms of t-value. D/W value is near 2 in all the five years indicating the regression results are reliable.

4.3.3 Relationship between corporate governance and Banks, FIs and ICs holdings:

The results obtained in this regard are reported in an analytical frame in table no. 4.12 as under:

Part (a) in the study table reveals out the governance score along with the (%) Banks, FIs and ICs holdings for the study period 2004-08. Part (b) of the table depicts the regression parameters as regard to governance score and Banks, FIs and ICs holdings

Table 4.12 (a)

Banks, FIs and ICs Holdings and Corporate Governance

Banks, FIs and ICs Holdings (%)

2004

2005

2006

2007

2008

Governance

Score

Range

Aver-age

Range

Aver-age

Range

Aver-age

Range

Aver-age

Range

Aver

-age

58-76

(62.5)

.02-22.1

6.96

0.1-22.5

6.89

.03-21.2

6.41

.02-23.8

6.67

0-22.8

6.89

52-57

(54.3)

0-36.1

5.16

0-34.6

4.12

0-29.8

3.73

0-24.3

3.75

0-21.4

3.86

45-52

(48.7)

0-27.0

4.88

0-19.8

4.02

0-22.1

3.65

0-23.3

3.55

0-21.8

3.55

26-45

(40.0)

0-25.4

3.54

0-21.2

3.32

0-17.1

2.98

0-10.6

2.39

0-18.2

2.45

Table 4.12 (B)

Banks, FIs and ICs Holdings and Corporate Governance

Governance

Score

Banks, FIs and ICs Holdings (%)

2004

2005

2006

2007

2008

Constant

-2.57

-3.38

-3.08

-4.83

-4.83

b Value

0.21

0.23

0.23

0.29

0.30

SE

2.64

2.39

2.19

2.09

2.10

R2

0.04

0.05

0.05

0.09

0.09

t-value

2.96*

3.39*

3.37*

4.33*

4.35*

D/W

1.97

2.00

1.97

1.94

1.99

Predictor: Governance Score; Dependent Variable: Banks, FIs and ICs Holdings

*Significant at 5 percent level

The information inputs reported in part (a) of the present table depicts that the higher corporate governance score have larger proportion of Banks, FIs and ICs holdings in the sampled companies over the study period. The sampled companies with highest average governance score of 62.5 score points have highest average holdings over the study period. As it is 6.96 percent in 2004, 6.89 percent in 2005 and 6.41 percent in 2006, 6.67 percent in 2007 and 6.89 percent in 2008. Similarly, sampled companies with higher average governance score of 54.3 score points have higher Banks, FIs and ICs holdings. It is 5.16 percent in 2004, 3.73 percent in 2006 and 3.86 percent at the end of the study period. To validate it more, it is observed that the sampled companies with lower average governance scores have lower average Banks, FIs and ICs holdings too. The sampled companies with the lowest average governance score of 40 points have lowest holdings of this category of institutional investors. It is 3.54 percent in 2004, 2.98 percent in 2006 and 2.45 percent in 2008. Similarly, lower institutional holdings have been observed for the companies with lower average governance scores over the study period. Thus, it can be inferred from the above results that there is very strong and positive relationship between Corporate Governance Score and Banks, FIs and ICs Holdings.

The statistical significance of these observations through regression analysis is reported in the part (b) of the present table. The parameters support the inferences drawn on the basis of part (a) of the present table, as the degree of dependence is higher in all the years. All the values are considered significant (a=0.05) in terms of t-value over the study period. D/W value is near 2 in all the five years indicating the regression results are reliable.

4.3.4 Relationship between corporate governance and FII holdings:

The results obtained in this regard are reported in an analytical frame in table no. 4.13 as under:

Part (a) in the study table reveals out the governance score along with the (%) FII holdings for the study period 2004-08. Part (b) of the table depicts the regression parameters as regard to governance Score and FII holdings

Table 4.13 (A)

FII Holdings and Corporate Governance

(%) FII Holdings

2004

2005

2006

2007

2008

Governance

Score

Range

Aver

-age

Range

Aver

-age

Range

Aver-age

Range

Aver

-age

Range

Aver

-age

58-76

(62.5)

0-41.8

9.2

0-39.6

13.3

0-37.9

15.3

0.6-58

15.9

0-57

14.8

52-57

(54.3)

0-25.0

5.1

0-27.6

6.7

0-34.9

10

0-36.3

9.8

0-40

9.4

45-52

(48.7)

0-23.2

3.6

0-29.4

4.7

0-35.0

6.7

0-43.0

7.2

0-40

7.8

26-45

(40.0)

0-22.0

1.4

0-40.3

2.8

0-35.5

3.67

0-21.7

3.7

0-17

3.8

Table 4.13 (B)

FII Holdings and Corporate Governance

Governance

Score

(%) FII Holdings

2004

2005

2006

2007

2008

Constant

-11.87

-13.76

-15.54

-14.68

-12.47

b Value

0.39

0.40

0.42

0.40

0.36

SE

2.84

3.40

3.85

3.99

3.97

R2

0.15

0.16

0.17

0.16

0.13

t-value

5.98*

6.15*

6.46*

6.07*

5.47*

D/W

1.95

2.12

2.16

2.17

1.99

Predictor: Governance Score; Dependent Variable: FII Holdings

*Significant at 5 percent level

The information inputs reported in part (a) of the present table depicts that the sampled companies with higher governance scores have larger proportions of FII holdings over the study period. The sampled companies with highest average governance score of 62.5 score points have highest average FII holdings over the study period. As it is 9.2 percent in 2004, 15.3 percent in 2006 and 14.8 percent in 2008. Similarly, sampled companies with higher average governance score of 54.3 score points have higher FII holdings too. It is 5.1 percent in 2004, 10 percent in 2006 and 9.4 percent at the end of the study period. To validate it more, it is observed that the sampled companies with lower average governance scores have lower average FII holdings too. The sampled companies with the lowest average governance score of 40 points have lowest FII holdings of 1.4 percent in 2004, 2.8 percent in 2005, 3.7 percent in 2006, 3.7 percent in 2007 and 3.8 percent in 2008. Similarly, lower institutional holdings have been observed for the companies with lower average governance scores over the study period. Thus, it can be inferred from the above results that there is very strong and positive relationship between Corporate Governance Score and FII Holdings.

The statistical significance of these outcomes through regression analysis is reported in the part (b) of the present table. The regression parameters also support the inferences drawn on the basis of part (a) of the table. The degree of dependence in terms of b value is higher in all the years. All the values are considered significant (a=0.05) in terms of t-value over the study period. D/W value is near 2 in all the five years indicating the regression results are reliable.

Resume

The results of the third section describe that there is very strong and positive relationship between Corporate Governance Score and Institutional Holdings. The institutional investors have larger proportions of holdings in the companies with higher governance scores and smaller proportions of holdings in the companies with lower governance scores. But the results are mixed as to the relationship between corporate governance score and components of institutional holdings. As weak relationship exists between corporate governance score and mutual funds holdings. There is poor evidence as to companies with higher governance scores have higher proportions of mutual funds holdings and companies with lower governance scores have smaller proportions of mutual funds holdings. But on the other hand, very strong and positive relationship is observed between corporate governance score and Banks, Financial Institutions and Insurance Companies. The corporates with higher governance scores have higher proportions of Banks, FIs and ICs holdings where as the corporates with lower governance scores have lower proportions of these holdings. Likewise, very strong and positive relationship exists between corporate governance score and foreign institutional holdings as well. The companies with higher governance scores have larger proportions of FII holdings while lower proportions of FIIs are observed in the companies with poor governance scores. Hence, it can be inferred that companies with better governance practices attract larger investments from institutional investors than the companies with poor governance practices. Similarly, good governed companies witness higher stakes from Banks, FIs and ICs as well. Foreign institutional investors also have greater investments in better-governed companies. But the alternate inference is drawn with respect to mutual funds.

Resume

At the end of this chapter, on the basis of result outputs of first section, it is inferred that institutional investors have been consistently showing greater interest in the sampled companies over the study period. The same inference is drawn for foreign institutional investors, one of the components of institutional investors. To the contrary, Banks, FIs and ICs are gradually reducing their stake, inferring that they are loosing interest in the sampled companies over the study period. But the result outputs for mutual funds do not help draw any inference regarding investment behaviour of mutual funds in the sampled companies over the study period.

The inferences can be drawn on the basis of results outputs of second section that companies in which institutional investors have higher stake, observe better corporate governance practices than the companies with lower institutional stake. Institutional investors have significant positive impact over the governance practices adopted by the corporates. As the institutions increase their stake in the corporates, the governance practices show material improvement. Likewise, the companies with higher stake of Banks, FIs, ICs and FIIs also observe better governance practices than the companies with lower stake. Their higher stake also positively influences the corporate governance practices of companies. As they increase their proportions of holdings in the companies, the governance scores improve significantly. Likewise, the foreign institutional investors also have positive impact over the governance practices of companies. Companies in which FIIs have larger proportions of holdings have better governance practices to the companies in which FIIs have smaller proportions. But to the contrary, mutual funds do not have any impact over the governance practices adopted by companies. The sampled companies with higher proportions of mutual funds holdings are not depicting better governance scores to the companies with smaller proportions of holdings. The alternate inference is drawn for mutual funds.

It is inferred on the basis of result outputs of the third section that the companies with better governance practices attract larger investments from institutional investors than the companies with poor governance practices. The institutions give due consideration to the governance practices adopted by the companies while taking investment decision. Similarly, good governed companies witness higher stakes from Banks, FIs and ICs as well. They also have larger proportions of holdings in the companies with better governance practices to the companies with poor governance practices. Likewise, foreign institutional investors also have greater investments in better-governed companies. They also give due weightage to the governance practices of the companies and increase stake only in the companies with good governance and decrease stake in the companies with poor governance. But the alternate inference is drawn with respect to mutual funds. The governance practices adopted by the companies have hardly any impact over their investment decision. They have rather increased their proportions of holdings in the sampled companies with poor governance scores to the companies with better governance scores.