Understanding different ownership structures

Ownership structure might appear simple but may have a complex nature added to it. Hence, it is important to understand various ownership structures in the investment process; the conflict of interests that arise in them as well as its effects on corporate governance and the overall business.  

Dispersed vs concentrated ownership  

Ownership structures can be broadly classified as dispersed, concentrated, or a hybrid of the two. Dispersed ownership reflects a broad base of shareholders, where no shareholder has a dominant stake or control to influence the business activities. It is more of a democratic situation. On the other hand, concentrated ownership reflects an individual shareholder or a group of shareholders that have a significant stake in the company or control such that they influence the decisions of the company. Usually, family-owned companies or a group of companies (e.g., Tata Group) fall under this category. In India, the latter ownership structure is more common.   

Horizontal vs vertical ownership  

The word ‘control’ takes all the limelight here. The majority shareholder (i.e., more than 50 per cent stake) need not necessarily have control over the company. It is quite possible that a minority shareholder may exercise control over the company through horizontal or vertical ownership. Horizontal ownership involves companies with mutual business interests e.g., key customers, or suppliers) that have cross-shareholding arrangements with each other. Vertical ownership structure involves a company or group that has a controlling interest in two or more holding companies, which in turn, have controlling interests in various operating companies.  

Major types of shareholders include banks, families, government, institutional investors, group companies, private equity firms, foreign investors, managers, and directors. When managers and directors are also shareholders of the company, they are called insiders. Institutional investors typically include mutual funds, pension funds, insurance companies, etc. Foreign investors can have a significant influence on a company when they have more shares than domestic investors. Group companies might have a lesser percentage of stakes but can have significant control through horizontal or vertical ownership. Be it any sort of ownership structure, it is crucial for an investor to check if the interests of common shareholders are aligned with the management/owners of the company.