Even as bourses are looking at all means to get out of the bear grip, they are faced with yet another fear factor- that of company promoters pledging their shares to get access to funds. With stock exchanges are showered with details of shares pledged by promoters, after market regulator Securities and Exchange Board of India (Sebi) made it mandatory post-Satyam, the share counters of these companies have started witnessing the selling pressure on domestic equity bourses. Much of this, say experts, is because the market is in a bear grip and also because the end use of the funds raised through pledging is nor clear as yet.
While promoters of nearly 40 companies till date have disclosed to stock exchanges the details of shares pledged by them with various banks and financial institutions, majority of these companies have witnessed their share prices dipping to the extent of 16 % on the Bombay Stock Exchange (BSE).
With the accounting fraud committed by Satyam founder B Ramalinga Raju still alive in investors? psyche, market experts say investors have now become more cautious and wary of the real intention behind the promoters? move to pledge shares.
Deven Choksey, MD, KR Choksey Securities, said, ?Though Sebi?s move have brought more transparency in the system by making it mandatory for promoters to disclose their pledged share details, still from an investors point of view, it is more important to know where that money is going to get utilised. Until that information is known, investors will always adopt a very cautious approach towards those companies, especially under the current circumstances?.
Companies generally pledge their shares with either commercial banks or other financial institutions like non-banking finance companies (NBFCs). Market players feel when the shares are pledged with NBFCs or financial service firms, the level of discomfort among investors are very high. It is not known whether the proceeds from the shares pledged are utilised for the companies use or for promoters own personal use.
?It would be a good corporate government measures if the promoters come out and disclose details of how the proceeds from the pledged shares have been utilised,? said Sandeep Nayak, senior VP & head ? private client dealing, Kotak Securities, adding ?whenever the promoters pledge part of their stake with any financial institutions, shareholders always feels let down?.
However, a senior partner with a leading accounting firm mentions that the fact these numbers were not disclosed earlier is sending shivers down the investors? spine. ?Pledging of shares is a common phenomenon used by several leading industrialists. However, doing it in a falling market, especially this one where there is high-risk aversion and stress on asset quality, is extremely risky,? he adds.
This habit of pledging shares came into prominence two years ago when several promoters rotated monies in the share and other asset markets to make a killing and announced several ambitious projects. When the markets tanked, many withdrew. But with the liquidity crunch setting in, especially in the third quarter, many are now forced to pledge shares for genuine funding, says a fund manager.
For promoters, this could be a double whammy as on one hand the need for funds pushes them to pledge shares and reporting this causes the share price to dip and increases the risk of these shares being sold by the financial institution. As a fund manager says, ?Expect many cases of bankruptcy coming to the fore.?