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The value of India Inc's pledged shareholding rose 11 per cent in the June quarter over the March one, partly reversing a sharp earlier decline.
The value of pledged shares was Rs 1.94 lakh crore, up 11.5 per cent from the Rs 1.74 lakh crore at the end of March, shows data compiled by Edelweiss, the financial services group. The value reported is likely to increase, as 3,044 companies have declared their data so far, compared to 3,481 in the previous quarter.
Edelweiss attributes the increase to more weakness in the secondary market. It expects the pledging to increase further, as the interest rate environment remains a challenge.
“The market movement (in the June quarter) was flattish to negative…With a rate softening regime not in sight, companies will continue tapping the pledging avenue as a source of funds,” said Yogesh Radke and Sriram Velayudhan, analysts at Edelweiss, in a report on Wednesday.
Share pledging is a popular capital mobilisation tool among promoters. Typically, banks or financial institutions lend money to promoters with the latter's shares the collateral. In the event of a fall in the market or the price of a scrip, lenders ask for higher security, resulting in increase in share pledges. In June, the benchmark Sensex had its first quarterly decline in seven quarters.
IL&FS Transportation, Adani Enterprises and Reliance Power are among the companies that saw the largest rise in share pledging, states the Edelweiss report. There was a sharp fall in the stock prices of each of these during April-June.
Future Consumer, Dish TV and Future Retail were among those seeing a decline in promoter pledges, probably on the back of a rise in their stock prices. ABG Shipyard, Alok Industries, Bajaj Hindusthan, Essar Ports, Gammon Infra, Jaypee Infratech and Lanco Infratech—mostly all with high debt levels—have promoter pledging of more than 90 per cent.
Corporate governance experts believe excess promoter pledging should be a red signal for investors. The Reserve Bank of India in its financial stability report of December 2014 had called for closer examination of share pledging, stating high levels could be a risk to the financial system.
“The promoter shares can be significant collateral for a typical company if it wants to expand leverage. Pledging of shares is practiced in other advanced economies, too, but it has taken a significantly different form in India,” the central bank had stated.
