The slump in the equity market has weighed heavy on shares of companies whose promoters have pledged a majority of their stakes, reports fe Bureau in Mumbai. Data compiled by FE show that for 25 of such companies from the BSE 500 universe with a high proportion of pledged promoters’ stakes, the share prices have declined anywhere between 14% and 42% in 2016 so far. For the set of 140 companies from the universe for which data are available, the total value of pledged shares now stand at Rs 37,265 crore, or about 10% of the free-float market capitalisation of the BSE500 universe.
Names like Crompton Greaves, Unitech, Gayatri Projects, Jaypee Infratech, Alok Industries and Pipavav Defence & Offshore Engineering, where promoters have pledged more than 80% of their holdings, have lost more than 30% of their value in the year so far. In the last two trading sessions, when the benchmark Sensex lost about 3%, Bajaj Hindusthan, KSK Energy and RattanIndia Power — where the promoter’s entire stake is nearly encumbered — have fallen by about 13% each.
Generally, through pledging, promoters use their shares as collateral to raise money for either increasing their holdings in the company or raising working capital or term loans. While a jump in pledging is a common phenomena during a scenario of rising interest rates, the situation becomes a concern when promoters are heavily pledging their shares to borrow money, especially during a downtrend. When the share price of a company declines sharply, it could lead to higher margin requirements or eventual selling of encumbered shares by lenders, putting further pressure on that particular stock.
Recently, a Prime Database report said that in the quarter ending December 2015, promoter share pledges increased 14% to Rs 2.03 lakh crore sequentially. Promoters of 517 companies have pledged nearly 46.35% of their shares, the highest since the 2008 global financial crisis.