Share pledging new nightmare for investors

 Since most Indian companies are family run, promoters normally hold a substantial stake in a listed company and use their holdings as mortgages to raise personal loans for whatever may be the purpose. Lenders, banks or other financial institutions, are also comfortable with pledged shares because in case of defaults they can always recover money by selling them in the market.

This works fine when the stock prices and value of pledged shares are rising. But high levels of pledging can have distressing repercussions in stock prices as investors have recently discovered.

Share price of GTL, telecommunication infrastructure company, has nosedived recently-- it is down 70 per cent from a year ago level— as the promoters believed to have pledged nearly half of their holdings. For the same reason share prices of S Kumars Nationwide and Orchid Chemicals took a huge beating in the market.

The incidence of share pledging is widespread and cuts across all types of companies. According to a recent study by Delhi-based SMC Global Securities, promoters have pledged shares in about 782 companies in India and the total value of shares pledged by the promoters in all these companies put together is about Rs 1,53,000 crore.

In terms of shares pledged as percentage of total promoter shares, there are about 44 companies whose promoters have pledged between 90 and 100 per cent of their holdings. Companies like Tata Coffee, Gujarat Pipavav Port, Pipavav Shipyard, Ansal Properties, Koutons Retail are prominent ones in this category.

Then there are about 169 companies whose promoters have pledged between 50 and 90 per cent of the promoter holdings, according to SMC. Major companies in this list are Gati, Gujarat NRE Coke, United Spirits, Wockhardt, Spanco, Essar Oil, S Kumars Nationwide, Subex, Orchid Chemicals, Parsvnath Developers, Orbit Corporation, Unitech, DB Realty, Videocon, McDowell Holdings, Apollo Hospitals, etc.

The software company TCS topped the list when companies were ranked in terms of the value of pledged shares. Other big names are: Adani Power (value of Promoters shares pledged is Rs 9,213 crore), Hero Honda (Rs 7,787 crore), Tata Motors (Rs 4,865 crore), Asian Paints (Rs 3,365 crore), Jaypee Infratec (Rs 3,120 crore), United Spirits (Rs 2,945 crore), Suzlon Energy (Rs 2,836 crore), etc.

What is the risk?

Though pledging of a company’s share by its promoter, per se, is not a reflection of any poor performance of the company, investors must keep a close eye on such information. It is more crucial for companies with small market capitalisation and substantial promoter pledging.

This is because in a bear market, sliding stock prices prompt lenders to demand more margin money (known as margin call) from the borrower and if he fails to act on time, lenders press the sell button leading to further slide in prices.

Many a times the fear or a rumor of margin calls also trigger large scale sale of some shares leading to huge losses to other investors. In most such cases the fall has been so dramatic and quick that general investors had no time to react.

But do not paint all companies with the same brush, just because promoters have pledged their shares. Promoters of large companies belonging to financially strong groups can easily withstand margin calls and avert share sale, said SMC Global Securities Strategist & Head of Research Jagannadham Thunuguntla.

“There are companies such as TCS, Hero Honda, Tata Motors, Tata Power, Fortis
Healthcare which have significant promoter pledge. But they are fundamentally strong enough to withstand any margin call scenarios. Hence, it is very critical for investors to differentiate the promoter pledge scenarios, before making their investment decisions”, he said.

Thunuguntla also urged that the market regulator must create some mandatory early warning system that can caution all shareholders about share pledging.