The worrisome state of financials of most listed companies has led to promoters increasingly pledging their shares to access funds for meeting working capital requirements.
According to the latest data available with the Bombay Stock Exchange, the total value of pledged shares is pegged at Rs 1.57 lakh crore as on March 15. However, the more worrisome fact is that promoters of at least 39 companies have pledged their entire holding with banks and non-banking financial companies (NBFCs) while there are 121 listed entities wherein promoters have pledged more than 90 per cent of their stake.
Promoters of listed companies often pledge their shares to raise short-term capital to fund working capital requirements. The shares are typically pledged with NBFCs or even banks, which lend up to a certain percentage of the value of shares that are offered to be pledged.
While the total value of pledged shares has fallen when compared to the earlier levels — partly due to the overall fall in the market — the number of companies with high promoter pledging has gone up.
According to a recent analysis by Prime Database, a primary market tracker, as on December 31, 2015, there were 25 companies in which the entire promoter holding was pledged while as many as 79 listed entities had more than 90 per cent of the promoter shares pledged.
Experts say that the purpose for which promoters pledge their shares needs to be evaluated on a case-to-case basis before looking at it in a negative manner. If the additional pledging is for the company, then it is a good sign, while pledging shares for personal purposes is a concern, they say.
“Pledging cannot be generalised. Promoters could be pledging more due to increasing debts. The borrowing could be going up without any corresponding rise in profitability. It could also be for raising funds for other ventures. The promoter could be facing a default scenario and might have to furnish additional securities to avoid default. Investors should carefully look at the purpose of pledging and then take an informed decision,” says JN Gupta, managing director of SES Governance, a corporate governance advisory.
According to BSE data, promoters of companies like IVRCL, Era Infra Engineering, Gokaldas Exports, Pipavav Defence & Offshore Engineering, Subex, Nissan Copper and Gujarat NRE Coke are some of the listed companies where promoters have pledged their entire shareholding.
Further, promoters of companies like Essar Shipping, Amar Remedies, Ballarpur Industries, Deccan Chronicle Holdings, ABG Shipyard and GTL have pledged more than 99 per cent of their holdings.
A high share of promoter pledging could prove dangerous, especially in a volatile market, as a sudden fall in the share price could lead to a default scenario if the promoter is not able to furnish additional collateral.
Ever since capital market regulator Securities and Exchange Board of India made it mandatory for promoters to disclose information related to pledging, it has been used as a parameter for evaluating the financial health and corporate governance standards of the company.
The recent study by Prime Database had highlighted the fact that financial stress and a subdued equity market had pushed the quantum of pledged shares by promoters to a seven-year high in the quarter ended December 31, 2015.
The cumulative value of pledged shares was pegged at Rs 2.03 lakh crore as on December 31, 2015. There was a substantial rise as compared to the previous quarter when it was Rs 1.78 lakh crore. In percentage terms, pledging of shares by promoters had gone up from 43.92 per cent a year ago to 46.35 per cent on December 31, 2015. There are a total of 334 companies where promoter pledging is more than at least 50 per cent each, according to BSE data.
