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Share prices of companies with high promoter pledging continue to fall

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New Delhi | Updated: February 5, 2019 5:06:10 AM

According to Kotak Securities, in a rising interest rate scenario, promoters often use shares owned by them as collateral for loans. Shares of companies with high pledging of promoter holding tend to witness volatility. However, stocks with more shares pledging witnessed significant fall in market capitalisation in the last one month.

Investors are losing appetite for highly leveraged companies, as share prices of companies with high promoter pledging continue to fall amid concerns over draining of funding options and increasing borrowing costs, according to brokerages. Recently, investors started selling companies with high-pledge shareholding after the promoter of the Essel Group had failed to bring in fresh shares as collateral to make up for the crash in stock prices.

Based on the highest value of shares pledged by the promoters, top 50 companies on the BSE have pledged a cumulative amount of Rs 1.27 lakh crore. According to Prime Database, Adani Ports and Special Economic Zone has pledged the highest amount of shares amounting to Rs 18,668.04 crore, followed by JSW Steel at Rs 11,704.22 crore and Zee Entertainment Enterprises at Rs 9,227.90 crore.

Other companies with high number of pledged shares include Adani Transmission, Emami, Sterlite Technologies, Apollo Hospitals Enterprise, GMR Infrastructure, Future Retail and Reliance Power.

The stock of Adani Ports & Special Economic Zone declined as much as 12 percent in the past one month, whereas Adani Power plunged 20 percent during the same period. While shares of the group’s flagship firm — Adani Enterprises — plunged 19.4 percent, Adani Green Energy came off 17.2 percent. Additionally, in one month, the market cap of Reliance Power declined 37.7 percent. The market cap of Zee Entertainment Enterprises and Sterlite Technologies fell by 25 percent and 20 percent, respectively, in one month.

Pledging of shares is one of the means by which promoters can raise funds which could be used for multiple purposes.

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According to Kotak Securities, in a rising interest rate scenario, promoters often use shares owned by them as collateral for loans. Shares of companies with high pledging of promoter holding tend to witness volatility. However, stocks with more shares pledging witnessed significant fall in market capitalisation in the last one month.

“Higher the pledging, greater could be the risk of volatility in the company’s share price. This is because as share prices fall, the overall value of the pledged collateral falls. This would put pressure on the promoter to produce more assets as collateral. Sometimes, the lender may also be forced to sell some of the shares to ensure that the loan does not turn into a bad loan. If the promoter is unable to meet obligations of borrowing, the ownership of shares is transferred to the lender, who may then sell it to recover loans,” said Kotak Securities.

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