Market slump: Promoters pledge shares worth Rs 1.1 lakh cr

Almost one third of listed company promoters with market cap of more than Rs 100 crore have pledged a portion of their shareholding. A latest report by Crisil shows the total pledge works out to Rs 1.1 lakh crore worth of market capitalisation as on 18 November 2011.

A promoter pledges his shares to a bank as a collateral to receive loans. If the share price falls, the promoter has to pledge more shares to compensate for the fallen market value of the assets. If he fails to give more shares, the bank immediately sells the shares to make up for the losses which further drives down share prices.

Crisil Research’s analysis also reveals that of the listed companies which have reported pledging, in 183 companies, 25 percent or more of promoter holding is pledged. Of these, 107 companies have more than half of the of promoter’s holding pledged.

In as many as 14 companies, promoters have pledged more than 90 percent of their holding. That means the promoter could lose control over the company as well as share price volatility could be very high. Sector-wise, power generation, IT and ITeS, infrastructure, and pharma and healthcare companies have seen higher levels of pledging.

The issue is disclosures with pledging of shares is very poor, and when a bank calls for more shares or money to bridge the gap after share prices fall, the investors do not get to know. Business Standard quotes an NBFC official explaining that almost 2-3 times the loan amount worth of shares are pledged while taking loans. If a share price falls 50-60 percent, the financier demands more collateral. According to brokerage officials, the rate of interest is 13 percent for liquid stocks and 16-17 percent for illiquid stocks.

Mint also reports that many bankers are now seeing pledged promoter shares lose value and want more collateral. The BSE benchmark index, the Sensex, has lost 23.45 percent, wiping out Rs 3,516.18 trillion of investors’ wealth. And most promoters do not have the cash to compensate for the eroded value, and this has made stock markets slump farther, the report says.

“The market for such kind of lending against shares is estimated at Rs 25,000-30,000 crore; depending on the market conditions, it can swing Rs 4,000-5,000 crore either way,” Mint quoted a company official saying.

There are 14 companies where promoters have pledged more than 90 percent of their shares. The names are: Gujarat Pipavav, Tata Coffee, Vikas VSP, ICSA, Edserv Softsystems, Ansal Properties and Infrastructure, Blue Coast Hotels and Resorts, Western Indian Shipyard, GTL, Birla Power, AGC Network, Andhra Cements, Gayathri projects and Kingfisher Airlines.

Watch video:Need to improve disclosures on pledged shares: Ican