Share pledges on the rise as funds dry up

A volatile stock market with an underlying weak trend has made fund raising difficult for companies forcing promoters to increasingly resort to pledging their shares to raise finance.

Data show that for the first time the number of companies, wherein at least some part of promoter share is pledged, has crossed the 500-mark — 509 to be precise — on the National Stock Exchange (NSE) that has a little more than 1,900 companies listed.

Further, data from Prime Database show that while the total value of pledged shares was pegged at ₹2.09 lakh crore at the end of February, there were nearly 50 companies wherein more than 99% of the promoter share was pledged.

Near 100% pledged

Companies such as Ankit Metal & Power, Bajaj Hindusthan Sugar, Gammon Infrastructure Projects, GTL Infrastructure, IL&FS Investment Managers, IVRCL, Reliance Naval & Engineering, Visa Steel, McDowell Holdings, Kwality, Alok Industries, Ballarpur Industries and Asian Hotels (North), among others, have almost all the promoter shares pledged.

Promoter pledging refers to the practice of promoters giving their shares as collateral to financial institutions — banks, non-banking finance companies (NBFCs), mutual funds — to raise funds to meet short-term capital requirements or, at times, even for capital expansion when other avenues are difficult to tap.

Incidentally, the share of pledged shares held by NBFCs has touched an all-time high of nearly 42% as mutual funds try to reduce their exposure in the segment.

The share of banks has also touched an all-time high of 13.73%, as on February 28.

Mutual funds have been in focus recently especially in terms of their exposure towards pledged shares as stocks of Zee Group entities, Dewan Housing Finance and Anil Ambani Group, among others, saw a steep decline in their share prices.

The Securities and Exchange Board of India (SEBI) is already examining the exposure of fund houses in this segment while mulling whether the regulations for mutual funds’ exposure towards pledged shares need to be tightened.

MFs under lens

“Mutual funds had come under a lot of scrutiny over pledged shares and so fund houses have become slightly wary of this segment and seem to be reducing their exposure,” said Pranav Haldea, managing director, Prime Database Group.

“Given the increased focus on mutual funds as also the stress which NBFCs are under in the last few months due to the IL&FS issue, market share seems to be moving to banks. While the share of banks is on the rise, banks are tightly regulated in terms of their exposure towards loans against shares,” added Mr. Haldea.

Meanwhile, a section of market participants believe that the regulator should review the rules for disclosures related to pledging. The current framework makes it mandatory for the entities to disclose a pledge.

However, there is hardly any clarity about the reason or the purpose for which shares have been pledged.

“The whole aspect of pledging needs to be revisited. Currently, the entity discloses that a pledge has been created.

“There is, however, no disclosure about the objective or reason for the pledge,” said J.N. Gupta, managing director, Stakeholders Empowerment Services (SES), a proxy advisory firm.

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Printable version | May 17, 2021 10:29:17 AM |

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