In the aftermath of the Satyam imbroglio, both credit rating agencies and institutional investors are monitoring companies whose promoters have pledged shares to raise capital.
On January 21, the Securities and Exchange Board of India (Sebi) made disclosure of pledged shares mandatory after it came to light that former Satyam Chairman B Ramalinga Raju had pledged almost his entire holding with financiers to fund plans of other family-related firms.
Ever since, a string of disclosures made by promoters has left many institutional players surprised. “The extent of stress has surprised us. We are taking a fresh look at these companies,” said a mutual fund head on condition of anonymity.
Now, all institutional investors have started scanning such companies’ balance sheets more diligently and are taking a fresh look at their profits. This is to ascertain whether these promoters would be in a position to repay the debt raised by pledging of shares.
These disclosures have come in handy for rating agencies, which, in the past, used to dependent on lenders and other sources for this information.
Companies, whose promoters have taken this route, are being analysed to determine the possibility of future stress on their balance sheets. “Borrowings by sponsors against pledged shares could put pressure on the operating entities by way of higher dividend payouts,” explained Rakesh Valecha, senior director, Fitch Ratings India.
The reason: if promoters have to rely on the operating company to repay debts, they may be forced to tinker with the accounting practices to improve profitability. This, in turn, would help them declare higher dividends to unlock pledged shares.
“While we will definitely look at the end use of funds, we’ll also try to ascertain how the promoters plan to service the loans,” said Vikas Aggarwal, Senior Vice President, ICRA.
Many companies, on their part, have even declared the end use of such funds.
In some cases, rating agencies may factor in the extent of pledged shares and the end use of funds in the corporate governance parameter for rating a company.
“More specifically, Fitch has found that while strong corporate governance practices generally help ensure the likelihood of timely contractual payment, a fundamental weakness can have crippling consequences for a company's viability and, therefore, may constrain its ratings,” said Valecha.
