In Q4FY15, 25 crore shares, or 7% of the total promoters holding in 23 firms, had been invoked by financial institutions
While lenders to the promoters of 24 listed firms invoked shares pledged with them and offloaded 12.5 crore shares, amounting to 3.6% of total promoter holding in these companies, in Q4FY16, an FE study shows that it’s actually an improvement over the last four quarters. In Q4FY15, 25 crore shares, or 7% of the total promoters holding in 23 firms, had been invoked by financial institutions.
Generally, promoters pledge their holding in listed entities with financial institutions as collateral for loans. But if and when market value of the pledged shares falls, lenders first ask borrowers for additional collateral, and if it’s not provided, shares are sold in the open market. So, sale of pledged shares in the open market is generally associated with weakness in the equity market.
Shares of all these firms have underperformed the benchmark Sensex so far in 2016 with a fall ranging from 7% to 59%. The Sensex slid 5.5% during the same period.
The FE study also revealed that invocation of pledged shares has largely taken place in cases wherein promoters have pledged a majority of their stake. The average stake pledged by promoters in these 24 instances stands at 70% at the end of December 2015.
Invocation and consequent sale of pledged shares need not take place only due to fall in market price. It can also happen due to violation of any other provision in the agreement. “Lenders can exercise the option of invoking shares when a borrower defaults or is likely to default on any of the conditions in the pledging agreement,” said Prabhakar AK, head of research, IDBI Capital.
While promoters of Euro Ceramics, which had reported negative net worth of R181.08 crore for FY15, pledged almost all their shares as of December, 2015, promoters of companies like Marg, Cura Technologies., Orchid Pharma, Birla Capital, Alok Industries and KSK Energy Ventures had pledged between 91% and 96% of their holding.
Similarly, while the lender – Bank of India – has invoked nearly half of the Euro Ceramics shares pledged with it, Shrenuj & Company, Unitech and Plethico Pharma have seen invocation of anywhere between 6.5% and 17.4% of their pledged shares.
In FY16, Unitech saw the maximum invocation of pledged shares worth Rs 350 crore, Prime Database data showed.