Pledging of shares by promoters at a 7-year high

Findings point to a high level of financial distress among listed companies.

Updated - September 23, 2016 01:26 am IST

Published - January 19, 2016 12:00 am IST

25/04/2008 MUMBAI Broker at Motilal Oswal Securities brokerage house watches trading screen as sensex zoom up by 400 points in Mumbai on April 25, 2008.  Photo: Paul Noronha

25/04/2008 MUMBAI Broker at Motilal Oswal Securities brokerage house watches trading screen as sensex zoom up by 400 points in Mumbai on April 25, 2008. Photo: Paul Noronha

Financial stress and a subdued equity market pushed the quantum of pledged shares by promoters to a seven-year high in the quarter ended December 31, 2015.

There are 25 companies in which the entire promoter holding has been pledged while as many as 79 listed entities have more than 90 per cent of the promoter shares being pledged.

A study by Prime Database, a primary market tracker, shows that such pledging of shares by promoters saw an increase of 14 per cent in the last quarter of calendar year 2015, with the value of pledged shares increasing to Rs.2.03 lakh crore as on December 31, 2015, as compared to Rs.1.78 lakh crore as on September 30, 2015.

In percentage terms, pledging of shares by promoters has gone up from 43.92 per cent a year back to 46.35 per cent on December 31, 2015.

Promoters of listed companies often pledge their shares to raise short-term capital to fund the working capital requirements of the company. The shares are typically pledged with non-banking financial companies (NBFCs) or even banks, which lend up to a certain percentage of the value of shares that are offered to be pledged.

According to Pranav Haldea, managing director, Prime Database, the findings point to a high level of financial distress among the listed companies, especially as the equity markets are showing a downward trend. The study analysed all companies listed on the National Stock Exchange (NSE).

As per the study, there were pledged shares in as many as 517 of the 1,506 NSE-listed companies as on December 31, 2015. Six years back, the number of such companies was only 370. Also, during this six-year period, the percentage of total promoter holding pledged has gone up from about 27 per cent to 46 per cent.

Incidentally, there are 208 companies in which more than 50 per cent of the promoter’s shareholding has been pledged. According to Mr Haldea, high pledge levels are typically not considered a good sign by the investors as a downturn in the market price can lead to invocation and change in management.

There were as many as 25 companies in which the complete 100 per cent holding of the promoters was pledged as on December 31, 2015. The list includes companies such as AGC Networks, Bajaj Hindusthan Sugar, DQ Entertainment (International), Era Infra Engineering, Gokaldas Exports, IL&FS Investment Managers, IVRCL, Pipavav Defence & Offshore Engineering and Subex, among others.

Interestingly, there are also instances of companies wherein the promoters pledged a high quantum of their shares for the first time in the period between September and December 2015.

Listed entities such as Zenith Birla India, Sharon Bio-Medicine, Shriram EPC, Melstar Information Technologies, and Uttam Sugar Mills were among the 82 companies wherein the percentage of promoter holding pledged increased during the period.

On the other hand, companies such as Mangalam Cement, Ashapura Minechem, Tree House Education & Accessories, NCL Industries, Mangalam Timber Products, Prakash Industries, Century Enka, Ganesh Housing Corp, Gujarat NRE Coke and Sical Logistics saw a decrease in the quantum of share pledging by promoters.

The largest pledge creation transaction in the quarter was that of S.B.Adani Family Trust, promoter of Adani Ports & Special Economic Zone, which pledged 7.60 crore shares to IDBI Trusteeship Services.

In terms of the pledge, the entity with whom the shares are pledged, the maximum amount of shares were pledged to the Kotak Group followed by Indusind Bank.

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