Pledging of shares at a 7- year high

Pledging of shares basically relates to the scenario wherein promoters of a listed company pledge all,or some of their shares, in the hands of lenders as a collateral in lieu of loans. This is one of the many sources of borrowing money, especially in a volatile market with tight liquidity conditions.

Pledging of shares is common in companies where promoter holding is high. Shares of companies with high pledging of promoter holding tend to witness volatility. The Reserve Bank of India, in its Financial Stability report, flagged a concern over pledged shares. “Pledging of shares by promoters could pose a concern in both, falling or rising market scenarios, when large scale pledging of promoter equity could be deterrent  for retail investors’ wealth,” the RBI report said. Therefore, investors need to review the pledging of shares by promoters before buying stocks.

According to a Prime Database report, Pledging of shares by promoters in NSE-listed companies hit a 7-year high in the quarter ending December 2015. Promoter share pledging saw an increase of 14 per cent in the last quarter of calendar year 2015, with the value of pledged shares going up to Rs 2.03 lakh crore as on 31st December 2015, compared to 1.78 lakh crore as on 30th September 2015. As on 31st December 2015, there were pledged shares in as many as 517 of the 1506 NSE-listed companies, up from 370 companies 6 years ago. Over the period of 6-years, the percentage of total promoter holding pledged went up from 27 per cent to 46 per cent.

Higher the pledging, greater 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.

There were as many as 25 companies at the end of Q3FY16 in which the complete holding i.e.100 per cent of the promoter’s shares were pledged. Major companies amongst them include AGC Networks, Bajaj Hindusthan, Pipavav Defence, Subex etc. In all, there were as many as 79 companies in which more than 90 per cent of the promoter's shareholding was pledged and 208 companies in which more than 50 per cent of the promoter’s shareholding was pledged.

Top 10 companies by value of pledged shares include prominent names like Adani Ports & SEZ, Cairn India, TCS, JSW Steel, Essar Oil, Zee Entertainment, Reliance Power, Asian Paints, JSW Energy and GMR Infrastructure. Rise in pledging is observed as result of overall stress in the system. While in some cases promoters may have pledged shares to fund their own contribution for any new project, in other cases their pledging must have gone up with fall in their share prices to make up for additional security requirement against the borrowing.

Companies which moved from zero per cent to a higher percentage pledging of promoters' holdings in Q32015 were JMT Auto (0 to 93 per cent), and Khaitan Electricals (0 to 42 per cent). Overall, there were 82 companies in which the percentage of promoter holding pledged increased in this period. Most companies with high promoter pledging are highly leveraged and don't have sound cash flows.

However, companies which saw a decrease in pledging of promoters' holdings were Mangalam Cement (52 to 0 per cent); Ashapura Minechem (36 to 0 per cent); Tree House Education & Accessories (43 to 12 per cent); Gujarat NRE Coke (100 to 81 per cent) etc.

There were also companies whose pledged shares were brought down to zero during Q3: Mangalam Cement, Century Enka, Sanghvi Movers, Essel Propack, Blue Star etc. In totality, there were 78 companies in all, in which the percentage of promoter holding decreased during this period.

Overall, shares of promoters of 115 companies were pledged during Q3FY16. Whereas, promoters of 100 companies were released during the same period. In terms of the pledgee, maximum amount of shares were pledged with Kotak Mahindra Group, followed by Indusind Bank during the quarter. Shares of promoters of as many as 19 companies were invoked in Q3FY16. The company in which the maximum value of shares was invoked during the quarter was Pipavav Defence (Rs 300 crore).

Therefore, it is advisable to all the investors to check the reason behind the pledged shares, especially at a time when there has been a rise in uncertainty, volatility and dynamics,  around changes in interest rates and liquidity, which are speedily fluctuating the financial position of companies. Investors should keep in mind that if the pledged shares are beneficial to the company’s future business requirement then it should not be perceived to be a negative factor. However, investors should avoid investing in companies if the pledge is for the promoter's personal use, instead of business purposes like investment in other businesses or other companies.