Share pledges at 7-year high

Promoters of more than 500 companies had pledged 46% of their holdings by December

Promoters of 517 companies have pledged nearly 46.35 per cent of their shares, the highest since the 2008 global financial crisis.

According to a report by Prime Database, promoter share pledges increased 14 per cent in the last quarter of 2015. The value of such shares rose to Rs 2.03 lakh crore in December from Rs 1.78 lakh crore in the previous quarter.

Promoters pledge shares to raise capital for the company, to finance projects of group companies, growth or even for personal reasons such as buying property. Shares are generally pledged with non-banking financial companies, which extend loans up to 50 per cent of the value of the shares.

Pranav Haldea, managing director of Prime Database, said, “Given the fall in equity markets, this points to a high level of financial distress. High pledge levels are typically not considered a good sign by investors, as a downturn in the market price can lead to invocation and change in management.”

 

Among these 517 companies, 100 per cent of the promoters’ holding in 25 companies were pledged as on December 31, 2015. These companies included Bajaj Hindusthan Sugar, Gokaldas Exports, IL&FS Investment Managers, SEL Manufacturing, Subex, Spentex Industries and Pipavav Defence & Offshore Engineering.

There were 79 companies in which more than 90 per cent of the promoters’ shareholding was pledged. Another 208 companies had more than 50 per cent of the promoters’ holding pledged.

In terms of value of the pledged shares, companies like Adani Ports & Special Economic Zone, Cairn India, Tata Consultancy Services, JSW Steel and Essar Oil topped the list. The value of shares pledged by these companies is around Rs 40,000 crore.

Deven Choksey, managing director of KRChoksey Investment Managers, said, "I do not see the rise in pledged shares as a risk. In a growing economy, it is going to happen and it will only rise from here on. Fundamentally, it is a requirement from the bankers' side in the form of collateral and helps companies raise funds at a cheaper rate."

The October-December period saw 82 companies pledge more of their promoters' shares. The top companies that witnessed a reduction in promoters' pledged shares included Mangalam Cement (from 52 per cent to 0 per cent), Ashapura Minechem, Tree House Education & Accessories and Century Enka.

Pledging can become an issue if it involves more than 50 per cent of the promoter holding or more than 20 per cent of the company's equity capital. A correction in stock prices can trigger margin calls, which could lead to more shares being pledged.

If the share price falls below a threshold and the promoter does not have more shares to offer, the lender might invoke the pledge, leading to a further fall in the stock price. Lenders have on occasion invoked pledged shares and sold them in the market because promoters were unable to pay up on time.

The maximum amount of pledged shares during the quarter were held by the Kotak Group followed by IndusInd Bank. The value of pledged shares with the Kotak Group was Rs 2,188 crore.