The portion of promoters' shares pledged has been on a decline since September 2017 from as high as 3.11%.
Shares pledged by promoter groups went up in the September quarter to 2.52% from 2.47% in the June quarter. Interestingly, the increase in pledged holdings came after three consecutive quarters of decline through June 2019.
Outstanding promoters’ pledged shares were valued at Rs 1.73 lakh crore, which is about 1.24% of the total BSE-500 Index’s market capitalisation at the end of September 2019, Kotak Institutional Equities said in a report. The BSE-500 index accounts for about 94% of the nation’s market capitalisation.
The portion of promoters’ shares pledged has been on a decline since September 2017 from as high as 3.11%. Nevertheless, the September quarters of both 2018 and 2019 saw a sequential increase in the ratio. Sebi recently revised disclosure norms (August 7, 2019) for pledged shares to include all direct and indirect pledges of promoters versus only direct pledges earlier.
“We clarify that pledging of shares does not necessarily imply that a company or a promoter is under financial stress; banks (lenders) could have sought additional security in the form of promoter shares,” the brokerage said. Of the BSE-500 Index, promoters of 110 companies have pledged their holdings with financial institutions and banks as of September 2019, with companies such as Reliance Infrastructure, Gayatri Projects, Future Lifestyle, Reliance Capital and Zee Entertainment Enterprises pledging more than 95% of their holdings.
As worried investors opted to take risk off the table, shares of these companies massively corrected during the September quarter. While the stock of Reliance Infrastructure plunged 47.2% during the quarter, Gayatri Projects nosedived 31.98%. Future Lifestyle Fashions and Zee Entertainment Enterprises plummeted 10.22% and 21.6%, respectively, during the same period.
While pledged shares of JK Tyre & Industries and Triveni Turbine revoked or invoked by creditors during the quarter, Amara Raja Batteries and Dhanuka Agritech saw fresh promoter pledging in the September quarter. With shares of companies having high promoter pledging being witnessed massive value erosion, founders are often asked to top up their pledges with more stocks in order to maintain the margin. In some cases, owners sell their holdings to pare debt.
While the promoters of Emami sold 20% stake in the consumer goods company to lower debt, the promoter group of Bajaj Consumer Care sold 3.24 crore shares (22% of outstanding shares) to raise Rs 629 crore to repay debt. This has reduced the promoter holding from 60% to 38%, but the holding is free from all encumbrances.