The list has been growing since the directive by the Securities and Exchange Board of India (SEBI) to company promoters to disclose the shares they pledge. The ruling came about a month ago, and on last count, over 440 listed firms have come forward with details concerning the shares pledged by their promoters.
That?s quite a figure as the number of actively traded firms on the Bombay Stock Exchange is 2,520. So 440 of the total 2,520 companies implies a chunky 17.46% of the BSE universe whose promoters have pledged their shares.
This is just one part of the story. If the market capitalisation of these 440 firms is taken into account, then it works out to about Rs 4,34,262 crore. The total value of the shares pledged by the promoters, on the other hand, is about Rs 50,474.91 crore. If the latter is divided by the former, that is, 50,474.91 is divided by 4,34,262, it works out to about 11.62%, implying the percentage share of the total market capitalisation of these firms that has been pledged by their promoters.
This is quite a bit. The question then is: Why have promoters been pledging a significant value of their share capital in the first place? What purpose does it serve and how does the SEBI ruling help?
As far as the SEBI directive is concerned, a disclosure of this nature helps in making the system transparent, reason observers. ?This is market-sensitive information. Why should allied shareholders, investors and stakeholders not know about this?,? asks Jayesh Desai, partner and national head, infrastructure, real estate and government, Ernst & Young.
Rightly so. Though promoters in general haven?t been too happy with the ruling, the fact remains that disclosures like these make things clear about a company or companies. ?These are valuable measures in my view. It does help to bring about greater transparency,? says Rana Kapoor, managing director and chief executive officer, Yes Bank. ?It?s important to know to what extent promoters have pledged their shares,? says Lokesh Nathany, national head, distribution and wealth management, Almondz Global Securities.
It?s not surprising then for investors to base their decisions on these disclosures. ?It tells you how much control the promoter really has over his or her company? says a market observer.
For instance, many were surprised when B Ramalinga Raju, the tainted former chairman of Satyam Computer Services Ltd, first disclosed that all promoter shares, which stood at 8.61% of the share capital as on March 31, 2008, were pledged to fund operations of the firm, in his open letter to the board of directors on January 7 this year. ?He did not have a huge stake in the firm. On top of that, he?d pledged all of it over the years.
It wasn?t received too well. The stock price took a beating. It was weak anyways following the aborted attempt by Satyam to buy out group firms Maytas Infra and Maytas Properties in December last year. The disclosures in January brought the stock price down further. It just goes to show how important it is to disclose these things in the first place. You hide these facts and it could be dangerous in the long-run,? says an industry insider.
In fact, the key reason why promoters are not too keen to disclose shares they pledge is because they fear their stock price may take a hit as a result of this making their firms vulnerable in the process. ?How does it affect corporate governance if I disclose the shares I pledge? If there is anything that is affected, it is the shareholding pattern that too if the lender to whom the shares have been pledged decides to sell them,? says a harried chief executive who is also the promoter of a firm.
This point is seconded by A Mahendran, managing director of Godrej Sara Lee Ltd, ?I see this as a knee-jerk reaction (referring to the SEBI ruling) to what a few people have done in the past. It creates confusion in my view.? Says Rahul Bajaj, chairman, Bajaj Auto, ?The need is to reduce work, not increase it. Laws concerning corporate governance in India are better than what exist in Europe or Japan and are as good as what exist in the US. There is no point getting more laws in place. Enforcement of the current laws has to improve.? Says Abhay Firodia, chairman & managing director, Force Motors, ?Corporate governance norms keep changing from time to time. Some of it is constructive; some of it is an over-reaction to a one-off situation that may happen or occur. Compliance needs to improve.?
But for all the voices of discontent, the fact remains that the SEBI directive has made it mandatory for promoters to disclose the shares they pledge. This has been done by amending the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. So, promoters have no choice but to disclose ?to protect the interest of investors in securities?. This is throwing up some startling facts.
Like the number of real estate, steel and metal firms that have been pledging their shares is quite a bit out of 440 companies that have disclosed details of their pledged shares so far. The total value of pledged shares of real estate companies, for instance, works out to about Rs 3,215.28 crore. For metal firms, it is a bit higher at Rs 4,850.77 crore. In percentage terms, it works out to 9.61% for metal firms and 6.37% for real estate firms out of the total pledged value of Rs 50,474.91 crore. ?It?s sizeable,? says Jagannadham Thunuguntla, chief executive officer at the New Delhi-based merchant banking firm SMC Capitals.
Promoters, he says, have been pledging their shares for various reasons. At the centre of this is the need for capital. ?Beyond a point, expansion is credit-based not equity-based,? he says. ?This point is proved with the amount of pledging that has been happening over the years. Much of it actually happened during the last bull run. The growing economy threw up opportunities for expansion and promoters realised they could take advantage of the appreciation in their stock utilising it as a pledge to lenders when seeking funds from the latter. This way they didn?t have to dilute stake as such. It was merely a security for the loan taken.?
To what extent promoters have been going with their pledging exercise can be gauged from this fact: out of the 440 firms, over 30 firms had over 40% of their shares pledged by their promoters. Like Parsvnath Developers, for instance, whose promoters pledged almost 63.89% of their shares or Shaw Wallace & Co, whose pledged shares are in the range of about 62.50% or Jaiprakash Hydro Power whose pledged shares make up 60.08% of the company?s share capital. Tata Coffee, Tata Tele Services Maharashtra, Kingfisher Airlines and Wockhardt Ltd, on the other hand, have about 57.48%, 49.70%, 43.80% and 43.11% respectively pledged by their promoters. ?The scenario can be scary,? says an observer, ?With so much portion of the share capital being pledged by the company promoter, what if the share price tanks?
That puts pressure on the lender then to sell the shares pledged to him. This is a risky proposition.?
That is precisely what happened to Raju?s stake in Satyam in the period before and after his disclosure and consequent arrest this year. From 8.16% at the end of March last year, his stake came down to half by the end of the year. Into the current year, his stake kept falling steadily on account of panic selling by lenders to whom his shares were pledged.
It is because of these inherent risks attached that lenders, say observers, actually charge fairly high rates of interest on the loans they provide against shares. ?It?s a high-risk, high-return game,? says Thunuguntla.
A downturn in that sense does make the business of promoter lending a bit unviable because the underlying value of shares, which is used as a pledge, is not very attractive on account of a depression in stock prices due to low investor sentiment. ?But banks quite often ask for an additional security over and above the underlying charge on assets, when giving out loans,? says Navin Wadhwani, director, N M Rothschild & Sons. ?This way, promoters can negotiate a lower rate of interest and thereby reduce their cost of borrowing. It helps when the debt market is tight and funds are difficult to come by.?
But for all the optimism, promoters now, say observers, will be careful when pledging shares. ?The fact that you have to disclose what you pledge is likely to make promoters a bit wary. It?s not going to be as easy as it used to be,? says Desai of E&Y. ?The disclosure element will obviously put fear into promoters who are looking to expand their business. That?s worrisome because pledging is a normal exercise,? says Thunuguntla.
The fact that SEBI could make promoters disclose the purpose for which they have pledged their shares ? something that the regulator is said to be contemplating? could make things even tougher for the latter. ?I think more needs to be done like making promoters disclose the conditions under which the collateral can be liquidated apart from getting them to disclose the purpose for which they have pledged their shares. This will really make the system transparent,? says an observer.
Of course, to what extent the regulator is willing to go as far as this issue is concerned is anybody?s guess.