In FY17, the chart suggested NBFC share of total exposure at 30% against 35% for MFs.
The reported share of non-banks to promoter pledged shares stood at nearly half of the total exposure in the previous fiscal year, data within a Reserve Bank of India report showed.
According to the RBI’s half-yearly Financial Stability Report (FSR), the reported share of non-banks/others to pledged promoter shares has significantly increased over the last five years, even surpassing the share of mutual funds (s for the two latest financial years i.e. June 2017 to March 2019.
According to data available, non-bank share stood between 40%-50% of total debt for FY19 against around 35% for MFs. In FY17, the chart suggested NBFC share of total exposure at 30% against 35% for MFs.
The report noted that the share of mutual funds within the total exposure to promoter pledged shares has risen from around 20% between June 2014 and September 2014, to stand at over 30% currently.
As the FSR suggests, high level of pledging by promoters could be an indication of the company’s poor health and risky for any company as debt repayment would leave little room for growth. More importantly, promoters resort to pledging shares when existing debt management becomes tough, eventually leading to an increased debt trap and proving detrimental for investor interests.
Earlier this week, the Securities and Exchange Board of India (Sebi) sought to tackle the issue around shares encumbered by promoters, through enhanced norms for disclosure of pledged shares.
The regulator has made it mandatory for the promoters to disclose reasons for encumbrance when it crosses 50% of shareholding in the company. Similarly, disclosure would be required when it crosses 20% of total share capital in the company.
“In a falling market in particular, pledged shares are under pressure as diminished share prices bring down the collateral value, prompting lenders to either demand additional margins or sell the shares to protect their interests. Either of the actions can have a negative impact on stock prices, thereby eroding the wealth of the investors,” the report stated. “Such a movement is of particular concern when increase in the risk of underlying exposure accompanies falling share prices. In effect, debt instruments backed by equity shares have a downside that is akin to that of a short put option on the underlying shares.”