Promoters of 14 companies have pledged 90% or more of their holding, thereby exposing the companies to the risk of losing promoter control and also higher share price volatility if the prices fall from their current levels, according to a study by Crisil Research.
The report says promoters of 31% of the 1,214 listed companies, with a market capitalisation of R100 crore or more, have pledged a portion of their shareholding. The total value of pledges works out to R1. 1 lakh crore worth of market capitalisation as on November 18, 2011.
Crisil Research?s analysis also reveals that of the listed companies which have reported pledging, in 183 companies, 25% or more of promoter holding is pledged; this includes 107 companies with 50% or more of promoter?s holding being pledged. Crisil notes that against the backdrop of inadequate disclosure levels on share pledging, investment in such companies exposes an investor to severe price volatility in case a promoter is not able to meet payments or provide additional collateral in a falling market.
Other than Sebi?s current guideline which requires companies to disclose percentage of promoter holdings pledged, there are no regulations which make it mandatory for promoters to disclose other crucial details like purpose of funds raised through pledging of shares, price at which the initial pledging is made and the conditions under which the margin call will be triggered.
Since the value of the collateral (pledged portion of promoter shareholding) is linked to the daily stock price, the fall in stock price below a threshold level leads to a margin call requiring the promoters to pledge additional shares to make up for the erosion in value, the report points out. In case promoters don?t do so, lenders cover the losses by actively selling the pledged shares in the market, leading to further price fall.
Typically, promoters pledge their shares either with banks or non-banking financial institutions (NBFCs) as collateral to raise corporate loans or to raise money in their personal capacity to infuse equity in the company. With NBFCs, since shares are pledged as primary collateral, the NBFCs trigger the margin call (request to top up collateral) when share prices fall and breach the threshold price and promoters are asked to bridge the gap immediately.
The sharp fall in stock prices in 2011 has put pressure on promoters, to make good the loss in the value of the collateral. Investors, especially retail investors, are oblivious of such details, and eventually incur losses because of sharp fall in prices, the report observes.