Amid an overall negative trend in the stock market and fewer avenues to raise funds, promoters are increasingly becoming dependent on pledging their shares to raise capital, which is viewed as a risky proposition, especially in a volatile market.
Data from the BSE shows that the number of companies with promoters pledging their shares increased last quarter, with non-banking financial companies (NBFCs) tightening their grip in an area of lending where mutual funds have also become quite active.
Pledging on the rise
In the three months ended March 31, the number of companies whose promoters had pledged their shares rose to 3,074 from 3,003 as on December 31. Further, the three-month period saw NBFCs raise their share in this lending space to as much as 60%, from 39%.
“This is a significant rise considering it is just over one quarter,” said Pranav Haldea, managing director, Prime Database.
“NBFCs are becoming more dominant in this space as the overall risk appetite of banks is going down due to their own challenges. Capital market has risks and there have been instances in the past when stocks have been hammered during bearish periods. Also, NBFCs have lesser restrictions compared to banks,” he added.
According to a recent analysis by Prime Database, Kotak Group was one of the biggest players in this segment, with the NBFC and mutual fund arms of Axis Group, ICICI Group and HDFC Group also being among the top entities.
“Our loan book size has increased by about 5-10% in the last one year,” said Paritosh Kashyap, MD & CEO, Kotak Mahindra Investments Ltd., an NBFC.
Limitations of banks
“Banks have restrictions in terms of their overall capital market exposure and also in terms of the quantum of loan against shares. While RBI regulations cap such funding at 50% of the value of shares pledged, we generally keep additional margin so that we do not immediately have to ask for top-up when the markets fall. We also have real-time risk monitoring and risk parameters in terms of whom we lend to and how much we lend,” he added.
Promoter pledging refers to the practice of promoters giving their shares as collateral to financial institutions to raise funds to meet short-term capital requirements or, at times, even for capital expansion when other avenues are difficult to tap.
Many do not view such pledging as a good practice, since any significant fall in the market could lead to the pledge being revoked by the lender and the shares being sold in the open market.
Interestingly, while the benchmark Sensex fell a little more than 3% between December 31 and March 31, the value of pledged shares fell more than 21% from ₹3.04 lakh crore to ₹2.40 lakh crore over the same period.
Shares’ vulnerablity
“Shares which are pledged are more vulnerable than the market,” said Arun Kejriwal of Kejriwal Research & Investment Services.
“Such shares have a tendency to react much more than market movement. And if a company whose shares are pledged is part of the derivatives segment, then it is a walking signboard inviting trouble,” he added.
Incidentally, the Securities and Exchange Board of India (SEBI) has made it mandatory for companies to disclose to the stock exchanges every time such a pledge is created.
