Value of stocks pledged twice of last year’s.
Even as the liquidity situation remains steady, Indian companies seem to be increasingly looking towards the share pledging route for fund requirements.
According to a study by Morgan Stanley Research, the value of shares pledged as of March 2010 more than doubled to $34.2 billion (Rs 1.55 lakh crore), as against $15.8 billion (Rs 72,000 crore) in March 2009.
As the liquidity situation eased, 137 companies revoked their pledges on shares in the last financial year. And, of the 115 new companies that got added, 53 joined the list in the last quarter. “Small and medium-size companies may have begun to feel the pinch of the tightening and started to look for the pledging route,” says Prabal Banerji, President (Finance) and Group CFO of the Hinduja Group. “The sluggish IPO market in the last quarter would have also prompted some of the companies to defer their fund raising plans and resort to this high cost borrowing route.”
“At the moment, it would be difficult to ascertain the exact reason for promoters pledging their shares. Companies are not required to report the end-use of these funds. The regulator should look into this matter urgently, as the number of companies resorting to share pledging is on the rise,” says Prithvi Haldea, CMD, Prime Database.
The study points out that 723 companies have disclosed pledges on their holdings for the quarter ended March, versus 745 companies in March 2009. The overall stocks of these companies account for 22 per cent of India’s current market capitalisation, a tad higher than in March 2009. The pledged portion accounts for 2.5 per cent of the total market capitalisation. And, assuming 50 per cent margin, the bank credit to these promoters, at $17 billion (Rs 77,300 crore) is 2.4 per cent of outstanding bank credit.
Danger if banks call in
According to a senior investment banker, “Companies with strong plans, like expansion, acquisition, tapping of funds, have been resorting to this route. And, with the market remaining strong, the value of their pledges have increased. However, we could face a danger when the market corrects and the value of the pledges fall, having banks to resort to margin calls.”
It was in March 2009 that the Securities and Exchange Board of India directed promoters and founders of companies to disclose the amount of stock they had pledged. Several leading companies faced a margin call when the markets had tanked earlier, creating a tremor on the exchanges.
At this moment, power utilities like Adani Power and JP Power Ventures, along with consumer discretionary companies like Videocon and Zee Entertainment, have seen widespread pledging by promoters.
TCS with $3.8 billion (11 per cent of paid-up capital) has the highest amount of pledging. Tata Steel, Unitech and Suzlon Energy feature among the top companies to have pledged their shares.
