Promoters pledge shares worth Rs 1.1 trillion

Exposing their investors to a severe risk of losing money in the stock market, these promoters together have pledged shares worth Rs 1,10,000 crore (Rs 1.1 trillion), in terms of market capitalisation on November 18, 2011, with the lenders.

CRISIL noted that investment in such companies exposes “an investor to severe price volatility in case a promoter is not able to meet payments or provide additional collaterals in a falling market.”

The value of pledged portion of the promoter shareholding is linked to the daily stock price, and therefore a fall in the stock price below a threshold level leads to a margin call requiring the promoters to pledge additional shares to make up for the erosion in value. If the promoters are unable to meet the margin call, the lenders cover the losses by actively selling the pledged shares in the market, leading to further price fall.

CRISIL Research Senior Director Mukesh Agarwal said, “In 2011, the capital markets have been highly volatile due to looming concerns of high domestic inflation, rising interest rates and tepid global economic environment. These concerns have triggered a fall in the stock prices creating pressure on the promoters who have pledged shares to make good the loss in the value of the collateral.”

Agarwal further said that the investors, especially retail shareholders, are generally oblivious of such details, and eventually incur losses because of sharp fall in prices.
The study also pointed out that of the listed companies which have reported pledging, in 183 companies, 25 per cent or more of promoter holding is pledged. Within this, in 107 companies promoters have pledged 50 per cent or more of their holding.

In as many as 14 companies, promoters have pledged 90 per cent or more thereby exposing the companies to the risk of losing promoter control and also higher share price volatility if the prices fall from their current levels. Sector-wise, power generation, IT and ITeS, infrastructure, and pharma and healthcare companies have seen higher levels of pledging. (See chart).

A long list

There are several popular companies in which promoters have pledged substantial portion of the shares.

Such companies include Gujarat Pipavav (promoters pledged 100 per cent of their holding), Tata Coffee (100 per cent), Ansal Properties (98 per cent), Dunlop (92 per cent), Kingfisher Airlines (91 per cent), United Spirits (90 per cent), Essar Oil (84 per cent), McDowell Holdings (74 per cent), Suzlon Energy (69 per cent), etc.

Promoters pledge their shares mostly with banks or non-banking financial institutions (NBFCs) as collateral to raise corporate loans or to raise money in their personal capacity to infuse equity in the company.