Zee stock crash shows why you should avoid firms with high pledged shares

A decline in stock price, due to rumours of impending default, can trigger a big selloff

Shares of Zee group companies took a severe pounding last Friday. Promoter Subhash Chandra has pledged the shares in his listed companies to borrow money for paying off debts incurred to fund the group’s infrastructure foray. The event highlighted the risk investors run when they buy a stock where the level of shareholding pledged by the promoter is high. 

Promoters generally opt for pledging as a last resort, when they are unable to raise money through debt or equity issuance, which could be because their company is already highly leveraged. They then resort to a loan from a bank, non-banking finance