How hard is it to get to the bottom of your investor base? Part two
Sitting between the fully transparent markets and the more opaque ones are a large number of countries with share registers and sometimes relevant legislation, but often no penalties to enforce them. For those jurisdictions, consultants perform shareholder ID rather than global shareholder analysis, which is possible only in countries with full disclosure laws.
‘France is one of the better countries, with the domestic funds visible on the Titre au Porteur Identifiable register, and the Nouvelles Regulations Economiques legislation, which applies to international funds,’ Simms says.
Companies in Belgium, Greece, the Netherlands, Spain and Sweden have their shares held in a domestic central securities depository, which is structured around directly registered nominee accounts. Issuers can request a list of their shareholders from the depository, some of which proactively send out regular reports to companies. Again, however, the way shares are held can compromise transparency.
In Sweden, for instance, the disclosure obligation does not extend beyond the second layer of nominee account ownership, so there is no legal way to get the name of the beneficial owner. In Italy, there is a disclosure law with no penalties, and issuers can request identification only in the context of a corporate action. In Spain, firms enjoy a daily brief from the local clearing house about trading activity in their shares – but only domestic investors are named, and intermediaries appear without mention of the underlying foreign owners.
Some visibility on international investors can be gained in Spain and Italy, where investors need to register if they want to vote at an AGM. ‘In Switzerland, where no share register is available, you have very little to work with other than filings, so that’s rebuilding the ownership structure without a map,’ Scheer points out.
In Germany, there are two different systems depending on the type of stock. ‘Companies with registered shares – usually in strategic sectors such as banking, infrastructure or industrials – can adopt the disclosure regime of Section 67, whereas bearer shares need to follow the shareholder ID route,’ Owers says, adding that the country has been more hesitant in adopting the legislation. ‘It’s a powerful tool that IR teams could really benefit from but it’s not being used as widely as it could be.’
Mainland China has a unique market structure where all shares are held in a state-controlled depository that requires both retail and institutional domestic investors to register by name. Corporates receive a monthly report on movements in their shareholder base, though investors trading through the Qualified Foreign Institutional Investor program don’t appear, as only the name of custodial intermediaries is disclosed.
Shareholder ID is a less rigorous methodology than shareholder analysis, in the sense that research is carried out top-down instead of bottom-up: the process starts with a register, then works its way through the nominees to the beneficial owners, and is finally completed with data from various information sources to bring it together in the form of an analysis. ‘There’s a challenge in ensuring all the sources you get are accurate and that you’ve got the right team in place to be able to understand, read and ultimately translate the data into really useful information for the company,’ Owers says. ‘So there’s always more of a caveat attached to it.’
Stock surveillance versus shareholder ID
In the US stock surveillance looks at movement of money through the Edgar filing mechanism and voluntary disclosure from the institutions, which are quarterly positions from the funds filed up to 45 days later. The surveillance method compensates for the time lapse by directly interrogating portfolio managers on their positions.
‘Compliance departments of most major custodian banks long ago ceased to provide bank lists or shareowner records following heightened pressure from their institutional customers to discontinue doing so,’ explains Lucas Scheer of LS Global. ‘But numerous global asset managers that we contact for share positions in our client companies have their compliance departments regularly respond to our requests if we provide proper authorization from them.’
In the UK, the equivalent of stock surveillance is daily transaction monitoring. ‘Most of our clients from the FTSE 100 run a monthly analysis,’ says Alison Owers of Orient Capital. ‘We also provide it on a daily basis for companies that may have had some interesting movements in their shareholder base and want to actively monitor it.’
Because information comes from front-office contacts and not from compliance, stock surveillance can often be viewed as an art form. ‘You can extrapolate and make assumptions but it’s not scientific, in my opinion,’ says Mark Simms of CMi2i.
This article appeared in the Fall 2017 issue of IR Magazine