India Inc is on a pledging spree. An analysis of recent disclosures to stock exchanges for the quarter ended September 2010 reveals that promoters of 101 out of 1,620 companies had pledged more shares over the June quarter. The value of the pledged shares increased 8% during the quarter to Rs 1,57,000 crore.
?While the credit situation is tight, there are ample business opportunities to deploy cash, be it for acquisitions or reinvesting in existing businesses,? said Vishesh Chandiok, national managing partner, Grant Thornton, a leading audit, tax and advisory firm. Promoters are pledging more shares in the current scenario to capitalise on such opportunities, he added.
Promoters typically pledge their shares as collateral to raise working capital or term loans from banks. This is especially true in times of a liquidity crunch and for capital-intensive businesses like realty and infrastructure where gestation periods for the projects are typically longer. ?The capex cycle is about to turn and firms are gearing up for greater investments. And now with the share prices of several companies seeing an uptick, they can draw more against shares,? said Raamdeo Agrawal, co-founder, Motilal Oswal.
Pipavav Shipyard, JSL Stainless, Sintex Industries and Network 18 have increased the percentage of their pledged shares by more than 8% in the past quarter.
Other notable companies that have raised the percentage of pledged shares by more than 3% include Shiv-Vani OilGas, Oudh Sugar Mills, Henkel India, Gitanjali Gems, Religare Enterprises, Bombay Dyeing, Dish TV and Asian Paints.
Promoters of several infrastructure players had offloaded their shares for pledging. ?Construction companies have moved from an EPC (engineering, procurement, construction) to a mix of EPC plus developer BOT (build, operate, transfer) model. This is more capital-intensive as firms bring in their own resources to buy the land, adding to funding costs,? said an analyst with a leading brokerage house.
?Pledging is usually resorted to fund short-term needs ranging anywhere from one to 12 months,? said Anand Shah, head of equities at Canara Robeco Mutual Fund. According to him, bigger groups like the Tatas (through Tata Sons) have successfully used such measures in the past to fund capital requirements of the group.
Pledging of shares by promoters is usually not taken positively by the market. ?There is a lot of negative perception associated with pledging of shares after the Satyam scam. But it could also be a good source of capital,? said Chandiok. Then, there is the risk associated with losing promoter control, like it happened in the case of Great Offshore. ?We usually stay away from over-leveraged companies? said Shah.
Interestingly, several firms have reduced their percentage of shares pledged. These include Ahluwalia Construction, Alok Industries, JSW Steel, Peninsula Land, Fortis Health, Lanco Infratech and Motherson Sumi. Promoters often buy back shares with the dividend money they receive. ?Buying back (pledged) shares can inspire confidence in investors,? said Jagannadham Thunuguntla, director?merchant banking, SMC Capitals.
Pledging can be risky, especially in a volatile market, as the promoter will have to pay higher margin money in a falling market. If the promoter is unable to do so, lenders have the authority to sell the pledged shares to recover their funds. This can lead to a further drop in share prices.
Pledging of shares has been prevalent in India for many years. In February last year, market regulator Sebi made it mandatory for companies to give details of pledging every quarter. According to the Sebi rule, firms have to disclose details of pledged shares if it exceeds 25,000 shares in a quarter or 1% of the total shareholding or voting rights of the company, whichever is lower.