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Market meltdown has not only impacted the fortunes of investors but also cast its shadow on the promoters of a company. Pledging of shares by promoters of listed companies has reached its highest level with one out of three shares held by the promoters lying with the lenders now.
According to an analysis of BSE-500 companies for the quarter ended June 2013, the aggregate number of shares pledged as percentage of those held by promoters rose to 33.2% from 28.89% in March quarter and 26.42% in a year ago quarter.
Most promoters have pledged their shares as collateral to raise working capital or a term loan, to increase their holding or to fund an acquisition. Experts suggest promoters are forced to pledge shares with lenders in return for loans due to liquidity crunch.
Explains Saurabh Mukherjea, CEO - Institutional equities at Ambit Capital: “As the share prices come off, there are margin calls and the promoters may be asked for more quantum of stocks for pledging. So, one of the way promoters have started to deal with this is pledge more shares. Overall, the rise in pledging is a by-product of the falling share prices.”
Says A K Prabhakar, senior vice-president (equity research), Anand Rathi: “There can be multiple reasons why the pledging has increased. One of the obvious ones is that the Nifty has not corrected much, but over 50% stocks are below 2008 lows. So, the value of the total pledge has actually come down significantly. Hence, the promoters have to increase the amount of pledged shares to meet the requirement. The money market, too, has become tight. Pledging shares has become an easy way of raising short-term capital.”
Steep rise
Within the BSE top 500 universe, promoters of 120 companies had pledged their shares in the June quarter. Overall, the aggregate number of shares pledged as percentage of those held by promoters rose to 12.5% from 11.4% in the March quarter and less than 10.74% at the end of June 2012 quarter.
The value of shares pledged by the promoters of these companies rose to Rs 100,000 crore in the three months ended June 2013 from Rs 88,839 crore in March quarter as companies faced a liquidity crunch and high working capital requirements at a time when economic conditions remained challenging. The calculation is based on an average market price of the respective quarters.
For instance, Vedanta Group has pledged 38.7% shares to refinance the debt taken for Cairn India’s acquisition. This amounts to 65.8% of its 58.8% holding in the Indian oil and gas major.
The pledged shares are of Twin Star Energy Holdings Ltd. (TSEHL) which holds 100% in Twin Star Mauritius Holdings Ltd. (TSMHL), which in turn holds 38.68 % in Cairn India. TSEHL has pledged entire holding in TSMHL.
Of the total, those belonging to entertainment, realty, infrastructure, capital goods, oil and gas and pharmaceutical saw the largest rise in percentage of shares pledge during the quarter. On the other hand, Tata Group companies such as Tata Motors, Tata Consultancy Services and Tata Power Company saw the decline in pledged shares.
“There is a change of management in the Tata group. The new management is not looking at expanding aggressively and increase debt levels. Instead, they want to consolidate the business, reduce the debt component, clean up the balance sheet, increase the profitability and make the businesses more viable. Thus there is little surprise that the pledges have come down. I think this is the most appropriate approach in the current market conditions,” Prabhakar points out.
Companies such as Siti Cable, Dish TV, Elder Pharma, Kalpataru Power Transmission, Apollo Hospitals, Unitech, Orchid Chemicals and Pharmaceuticals, Core Education Technologies have increased pledged shares between June quarter 2013 and March quarter 2013.
Gitanjali Gems and Aanjaneya Lifecare saw in decline in pledge shares mainly due to invocation of pledge shares by the lender, which is usually done when a borrower faced with a steep fall in share price, is not able to deposit additional margin with the lender.
Interestingly, there were five companies, including Elder Pharma, Pipavav Defence, United Spirits and Housing Development & Infrastructure Ltd (HDIL), where owners have pledged their entire stake.
Promoters of another nine companies such as Wockhardt, Hindustan Construction Company, Lanco Infratech, Parsvnath Developers, DB Realty and Unitech have pledged more than 80% of their shares.
“I am not positive about any company where promoters are pledging their shares to borrow money because this is something that is an inherent risk and can create panic into the system. Many promoters are operating at a high-risk level. Borrowing money against own shares is counter-productive when the economic situation is bad,” said Deven Choksey, managing director, KR Choksey Securities.
In contrast, firms including Aurobindo Pharma, Emami, JSW Steel, Ajanta Pharma and Nitin Fire Protection Industries, saw a drop in percentage of stake pledged in the June quarter.
| Pledge shares in % | Price in | |||
| Company | March 31,13 | June 30,13 | Rs | % chg* |
| CORE Education | 41 | 73 | 16.65 | -67.6 |
| Lanco Infratech | 66 | 77 | 5.44 | -47.6 |
| NCC | 60 | 70 | 18.80 | -43.8 |
| Kalpataru Power | 33 | 52 | 61.45 | -25.6 |
| Max India | 54 | 64 | 173.85 | -22.4 |
| Swan Energy | 11 | 30 | 105.75 | -14.5 |
| Mandhana Indus | 28 | 41 | 231.75 | -5.4 |
| Apollo Hospitals | 41 | 55 | 824.25 | -1.1 |
| Elder Pharma | 80 | 99 | 293.95 | 3.5 |
| Cairn India | - | 66 | 314.05 | 15.4 |
| Pledged shares as percentage of those held by promoters | ||||
| *Over March 31, 2013 | ||||
| Source: CapitalinePlus | ||||
| Data complied by BS Research | ||||
