For companies and their promoters, the struggle to stay afloat amidst the slow business growth is reflected in the steady increase in pledged shares in recent quarters.
An analysis of shares pledged by promoters of companies in the CNX500 basket reveals that these shares have increased from under 10 per cent in June 2014 to 10.5 per cent in March 2015 and nearly 11 per cent in June 2015.
Companies such as IL&FS Transport, Mangalore Chemicals and Gujarat NRE Coke witnessed a 98, 43 and 34 percentage point increase, respectively, in the proportion of promoter-pledged shares.
Promoters of four companies have pledged all their holdings, up from two in March 2015. In 17 companies, over 90 per cent of the shareholdings are pledged, up from 15 just three months ago.
The situation seems to have worsened compared with June 2014 when the number of companies with over 90 per cent of promoter holding pledged was 13.
Pledging seems to be more common in infrastructure companies. Of the 17 CNX500 companies where promoters have pledged over 90 per cent of their holding, seven are from the infrastructure segment. Companies in the power and real estate sectors also have a high proportion of pledged shares.
Interestingly, smaller companies seem to be facing greater trouble, going by this metric. All the companies, barring Suzlon Energy, where over 90 per cent of the promoter holding is pledged, had a market cap of under ₹5,000 crore.
This is worrisome for investors on more than one count. One, when markets are on a downtrend, there may be margin calls on the pledged shares. This can lead to more shares being pledged or block sales by the lender, leading to a stock price crash.
Two, the lending institutions may take ownership of the shares and the promoter may lose control. Such control transfers could happen without the knowledge and consent of all shareholders.
Three, there are not enough disclosures on pledged shares beyond the number. For instance, money may be raised for personal reasons, purchase of assets or for raising funds for expansion or working capital for the company, says Deep Mukherjee, Senior Director, India Ratings and Research.
And, four, promoters who have pledged nearly all their shares do not have enough skin in the game, and may not be interested in the company, says Yogesh Sundaram, President, Trading & Investment Management, at Paterson Securities.
Investors bewareSo, it is important to be wary of companies where a high proportion of shares are pledged, caution experts.
“Investors should look at the ratio of promoter holding that is pledged along with what portion of total outstanding shares are pledged,” says Gaurav Mehta, strategist, Ambit Capital.
Karthik Rangappa, Vice-President at Zerodha Varsity, says investors eagerly watch insider-trading information, but watching pledged shares may be more helpful. “The impact of insider trading is relevant only in companies with a market capitalisation of less than ₹5,000 crore”, he says. So, does it mean that when promoters release pledged shares there is reason to cheer? Not quite, says Sundaram of Paterson Securities. “If more than 20 per cent of total outstanding shares remain pledged, investors must continue to be worried,” he says. With this thumb rule, investors in 48 or about 10 per cent of the CNX500 companies have reason to be worried.