Rising interest rates and a decline in the stock prices during the March quarter induced about 825 companies to pledge shares worth R1.73 lakh crores.

Promoters of DB realty, Jyoti Structures, Everonn education and Aqua logistics, promoters pledged as much as 50% to 65% of their holding for borrowing money during the march quarter, as per recently released exchange data.

Experts feel that in an environment of higher interest rates where the working capital requirement continue to increases, pledging of shares by companies may not be a good sign.

? The trend of pledging of shares by promoters in corporate in India is observed from quite some time now. In most of the cases promoters pledge their shares to borrow funds for buying fresh shares of the company thereby increasing their total stake,? said Sudip Bandyopadhyay, president, Destimoney Securities.

In three months ending March 2011, atleast 190 of BSE 500 companies pledged shares. There were close to 100 companies whose promoters’ pledged more than 20% of their holdings in the company while pledged shares accounted for more than 15% of the total equity for close to 70 companies.

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 loan. In some instances like the case with Hero Honda motors, promoters pledge their shares for buying out their stake in joint venture companies or funding acquisitions.

However, the situation becomes a concern when promoters are heavily pledging their shares to borrow money. In cases where the market is on a downtrend and the share price of the company declines substantially, chances of a default on margin calls increase, putting further pressure on the share prices. For instance DB Realty has corrected 50% for the year till date, while Arss Infra and Jyoti Structures corrected more than 35% each which in turn could have triggered margin calls.

According to exchange data, pledged promoter shares has increased substantially for all these companies during march quarter.

? Substantial increase of pledging becomes a tricky situation for smaller companies as the risk of default on margin calls can turn higher. Unless the share price or fundamentals of the company improve mid-cap and small-cap companies with higher promoters? pledging become risky bets,? said an analyst.

For 29 out of these 200 companies, the value of pledged shares was more than 25% of their latest market-cap. This included a subset of 8 large-cap companies while the rest 21 companies were from the mid-cap space with a market-cap of less than R5000 crore.