Promoters of BSE 500 companies have pledged 1,741 crore shares in the first quarter (April-June) of the financial year 2017/18, up from 1,608 crore in the year-ago period. At the time of our analysis, 485 companies have declared their share-pledging data.
Shares can be pledged by a promoter to raise funds for the same business, finance other projects or get money for personal use.
"In a bull market, with rising share prices and the market brimming with optimism, lenders usually do not hesitate to go for such deals. Problems start with the start of a bear market," says Jimeet Modi, Chief Executive of SAMCO Securities.
"Promoter pledging is usually the last option to raise funds as it shows lenders do not have faith in the company's ability to pay back the loan. In case shares are pledged for a promoter's personal use, it may not augur well for the company," he adds.
Data reveals that the promoters of these 485 companies have pledged 9.3 per cent of their total shares in the June quarter, which is the fourth highest during the past 20 quarters. In the quarter ending March 2017, share-pledging stood at 9 per cent of the total promoter shares. Interestingly, shares pledged by the BSE 500 companies have been more than 9 per cent for all quarters beginning June 2015 except for the Oct-Dec quarter of 2016/17.
Total value of the shares pledged in the June quarter stands at `1.87 lakh crore, 29 per cent more than the corresponding quarter in the last fiscal. But the jump in value could be attributed to rising stock prices during the current bull run.
A total of 133 companies have pledged their shares in the June quarter, and 75 of them have raised their pledging compared to the year-ago period. Another 50 companies have pledged more than they did in the fourth quarter (Jan-March) of 2016/17. The top three companies which have seen maximum rise in pledged shares include Jindal Stainless (Hisar), Max India and Future Lifestyle Fashions. For Jindal Stainless, the percentage of the shares pledged has gone up from 19.3 to 87.7 quarter on quarter; Max India has seen an increase to 65.4 per cent from 24.3 per cent while Future Lifestyle Fashions has seen a rise from 30.7 per cent to 57.1 per cent.
There are 33 companies whose promoters have pledged more than 50 per cent of their shares. Shares pledged by the promoters of seven companies have reached a critical level of over 90 per cent while the promoters of Bajaj Hindusthan Sugar, CG Power and Industrial Solutions and Reliance Defence and Engineering have pledged 100 per cent of their shares. Next in the list are Suzlon Energy and Videocon Industries who have pledged 99.4 per cent and 98.5 per cent of their holdings, respectively. In contrast, 38 companies have witnessed a fall in the number of shares pledged during the last quarter of 2016/17. India Cements, NCC and Gateway Distriparks have seen maximum decline in the number of shares pledged in the June quarter.
What It Means
A high degree of promoter pledging usually has negative implications, and share prices of those companies are usually more volatile. If prices fall, lenders may ask to make up for the reduced value of the shares pledged, held as collateral for the loan given.
"Risk increases for investors when promoters take personal loans against share-pledging. If they default on their debts, it can lead to lenders selling off the pledged shares in the open market. This would lead to a downward spiral in the share prices of the company," says Modi.
Pledging is not always bad. Shares are pledged by companies with strong balance sheets to meet their funding requirements. These companies are quite capable of paying off their debts and investors need not worry in such cases. Modi, however, warns investors to avoid companies where 80-90 per cent of the promoters' holding has been pledged, no matter how compelling the investment opportunity. "Protection of capital is more important than making money."