Four reasons why Naresh Goyal’s pledging of Jet Airways shares is intriguing
Investors cannot be blamed for pummelling the shares as the move is intriguing for the following 4 reasons
Naresh Goyal has pledged his entire 51 percent stake in Jet Airways to state-run Punjab National Bank, the company informed the stock exchange in a filing yesterday.
Pledging of shares is process where the promoter in his individual capacity or through a holding company raise loan from a financial institution by keeping the shares as a security or collateral.
Goyal has pledged 5.79 crore shares worth about Rs 2,700 crore. However, the company or the bank has not yet revealed the amount of debt the company raised through the pledging. The development has sent the Jet shares spiralling downward about 6 percent in morning trade.
At 11:49 am, the stock was trading at Rs 450, down 3 percent on the BSE, probably after company officials clarified to the Business Standard that the loan was raised a few months ago. "Goyal gave a "non disposal undertaking" to the bank," the report said citing sources.
Nonetheless as the move is intriguing for the following 4 reasons.
1) The company has not given any reason for pledging the shares. This has fuelled investor concern because ideally, with Etihad picking up 24 percent stake worth Rs 2,069 crore last year, the company was supposed to be on a strong footing. So there is no clarity as to why the company needs funds now? Moreover, the company had recently raised syndicated loan of $150 million from West Asian financial institutions. The company had then said that the money will be used to fund its three year turnaround strategy. “This syndicated loan facility will be instrumental in underpinning the airline on this progressive path,” CEO Cramer Ball was quoted as saying in this report.
2) With the international crude oil prices falling and the air turbine fuel declining in tandem, airlines were poised for a better year head. A Crisil research report had recently pointed out that domestic carriers are expected to post an operating profit of Rs 8,100 crore in 2016, which will be a complete "U-turn" from the Rs 1,500 crore loss posted in 2013-14. The report, however, said the companies will not be able to log a net profit in the near future unless they get a huge Rs 35,000 crore capital. Goyal’s move would mean that the fund infusion by Etihad or even the more than 50 percent fall in crude oil prices over the last few months have not helped Jet Airways much.
3) Share pledging has many inherent problems. As Deep Mukherjee, senior director - corporate ratings, India Ratings and Research, explained in this Firstpost article, this product “a heady mix of information asymmetry and built-in moral hazard issues”. Share pledges have inherent clauses that allow the lender to sell the shares kept as collateral if the stock prices crash and the promoter fails to restore the loan-to-value ratio or service the debt. The issue of information asymmetry arises here. Lenders have a privileged information since they can sense whether the borrower has a tendency to default. Once they sense this, they are likely to start selling the collateral, trapping the small investors. Investors in general are wary of share pledges due to this reason. In Jet’s case, since the company has not given any clear reason as to why Goyal has pledged his entire share, investors are flummoxed.
4) What is the reason behind the move? Is this aimed at raising resources for further expansion? Or does this signal a stress on its books and repayments to lenders? The company has Rs 8,000 crore debt as on 30 September 2014
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