Pledged Promises: How Safe Are They?

Your story on corporate governance was extremely insightful—thank you for the valuable analysis. Could you also shed some light on how risky high promoter pledging can be for investors, and where this information is available? - Jay Inamdar 

Editor Responds: We truly appreciate your encouraging words. High promoter pledging is often viewed as a red flag by investors, as it may indicate financial stress or a promoter’s dependence on borrowed funds. When promoters pledge their shares as collateral to raise capital, they risk losing control of the company if share prices fall and lenders invoke the pledge. This could trigger forced selling, leading to a sharp decline in stock prices and overall investor confidence. Moreover, excessive pledging may reflect weak corporate governance or a lack of financial discipline.

Investors should monitor the percentage of promoter shareholding that is pledged—anything above 30-40 per cent is generally considered risky, especially if the company has volatile earnings or high debt. This information is readily available in a company’s quarterly shareholding pattern, which is disclosed to stock exchanges and published on their websites. It’s also accessible through various financial data platforms. Stay tuned to Dalal Street Investment Journal for more insights.