Promoter pledging hit a six-month high on sustained decline in markets

More than Rs 15,300 crore of fresh pledges created in March as falling stocks prices force promoters to offer additional shares of their firms

The sharp sell-off in the markets has led to a spike in promoter pledging as declining share prices have forced company owners to offer additional shares of their firms. So far in March, fresh pledge creation stands at Rs 15,316 crore, which is highest seen in six months.

In fact pledging in March is up 24 per cent over February, showed data sourced from nseinfobase.com.

 

According to experts, the market cap erosion of these companies has forced their promoters to beef up the collateral value with more shares.  

"Promoters are forced to top up collateral as market caps of their companies have eroded amid the market sell-off. We have also seen lenders invoke pledge shares. In an environment where promoters are finding it difficult to repay loans given the tight liquidity, they are forced to top up their collateral value with more shares," said Pranav Haldea, managing director at Prime Database.

Among other firms, data sourced from nseinfobase.com and exchanges showed that firms where pledges were created in March included Adani Enterprises, Emami, Sadbhav Engineering and Aurobindo Pharma.

The stocks of these companies have corrected sharply, with prices trading 34-79 per cent below their recent peaks.

 

Market experts say companies with pledging have seen sharp selling pressure. “Conservative investors are quick to exit companies where there are high levels of pledging. Investors are even more wary of companies where along with pledging -- there is high leverage -- during such challenging market environment,” said G Chokkalingam, founder and managing director of Equinomics Research and Advisory.

Analysts say fresh pledging of shares is likely to remain on the higher side in the coming days.

An analysis done by India Ratings indicates that that twenty-one BSE-500 companies will be required to pledge more than 100 per cent of the promoter holding (as on 19 March 2020) to maintain a minimum 2.5-times share cover, assuming the quantum of loan-against-share (LAS) transactions outstanding as on 31 December 2019.

“In other words, these entities could be required to pledge additional collateral or deposit cash to maintain the original security cover,” India Ratings said in its recent note.

The sharp correction in share prices has put the entire LAS market at risk. Market volatility can spell trouble for lenders active in extending loans to promoters against their shares.

Analysis by India Ratings shows that of the 58 companies likely to have more than 50 per cent of their promoter holdings pledged, 19 are already in default while another 19 are classified as elevated risk of refinancing.

Sectors such as power, construction and metals, which have been most exposed to cyclical risks, are likely to see a high proportion of promoter holding pledged, analysts say.

Further, market participants say stressed promoters may be able to delay margin call if lenders are given the confidence that payments will be made in full.

“Lenders could delay selling the pledged shares as the recovery from such selling is likely to be lower, with shares already at beaten down prices,” said a fund manager.