Taking a Pledge

Shares pledged by promoters touched a 13-quarter high at the end of December.

Shares pledged by promoters have touched a 13-quarter high at the end of December

These are testing times for some promoters of Indian Inc. Data available for 150 companies of the BSE 500 index reveals that the shares pledged by their promoters had touched a high of around 1,413 crore in the quarter ended December 2016. This is 1.5 times the amount pledged in the December 2013 quarter, which stood at 914.3 crore.

The troubles of promoters seem magnified when we looked at things from another angle -- shares pledged as a per cent of total promoters holdings. By this yardstick, there was an increase of 1.4 percentage points to 34.4 per cent in the last two quarters, between September and December 2016. It was the highest over 13-quarters, way above 23.7 per cent in Q3FY14. “The December quarter was an exception by all standards and should not be considered as a trend,” says Jimeet Modi, CEO, SAMCO Securities.

Pledging, or transferring shares to a lender for a loan by promoters, has been constantly rising over the past three quarters. “The stock market slide since March 2016, which became more pronounced after demonetisation, might have triggered margin calls on promoter pledges and, therefore, the percentages of pledged shares have gone up,” adds Modi.

The Sensex has been swinging between a high of 29,000 and a low of 25,000 points since June 2016. Such high pledge levels could come under a threat of invocation (the lender transferring the shares to himself) in a declining market. “Higher percentage of promoter pledging should raise eye brows. This risk will become more apparent when prices start dipping,” says Vinod Sharma, Head of Business – Private Client Group, HDFC Securities.

Close to 42 per cent stocks of the sample size saw an increase in shares pledged by promoters over the last two quarters. Some have already reached a critical level of over 98 per cent. Companies such as Videocon Industries, Suzlon Energy and Rattan India Power, fall under this range. More than 25 companies saw promoter share pledging rising over 3 percentage points during September-December 2016. Companies such as Crompton Greaves and Bombay Burmah Trading Corporation saw an alarming rise of over 20 percentage points in their pledged shares during the September-December 2016 quarter.

Investors did not spare many stocks that have seen a significant jump in their pledged shares holdings over the last two quarters or have pledged shares heavily. Stock prices of these companies have plummeted over 10 per cent since October 2016 to end of January. The sign of stress was visible in their stretched balance sheets --- close to 47 per cent of these companies were reeling under heavy debt of over `1,000 crore. The worst affected were companies from capital intensive sectors such as capital goods, infrastructure, and power. ~

PLEDGING, OR TRANSFERRING SHARES TO A LENDER FOR A LOAN BY PROMOTERS, HAS BEEN RISING OVER THE PAST THREE QUARTERS