Promoters usually pledge their shares to (a) provide additional collateral for maintaining debt lines; (b) increase promoter stake; (c) infuse capital in other promoter entities.
The word ‘pledge’ in the last two weeks has earned a negative reputation. Pledging of shares is not essentially considered bad or should not be taken in a negative way, but fierce selling in stocks from ADAG pack, Essel Group as well as Apollo Hospitals has made investors cautious on companies with high promoter pledge shares.
It is popular among promoters because it helps them to raise funds quickly as shares are used as collateral by the promoters to raise debt.
Promoters usually pledge their shares to (a) provide additional collateral for maintaining debt lines; (b) increase promoter stake; (c) infuse capital in other promoter entities.
However, analysts advise investors to remain cautious of companies that have a high promoter pledge.
Elara Capital suggests that high promoter pledge increases the risk of a hostile takeover as well. In cases where pledging is done to fund other business interest, pledge becomes risky, especially when these businesses underperform and do not generate cash flows.
“We believe risk accentuates and investors need to be watchful when an increase in pledge is accompanied by a decrease in promoter holding,” it said.
Over the last 3 quarters, promoter pledge in BSE-500 index has increased by Rs 25,200 crore from Rs 1,70,000 crore to Rs 1,95,200 crore, Elara Capital said in a report.
Stocks which mainly contributed to this increase were TCS, Adani Ports, Adani Transmission, Sterlite Technologies, Sun Pharma, Dish TV and Adani Power.
As on Dec 2018, 3 percent of promoter holding is pledged, added the Elara Capital report.
As many as 27 companies within the BSE-500 index have seen an increase in pledge shares in 3 out of 4 quarters which include names like Reliance Infra, ZEE Entertainment, Dish TV, Adani Ports, JSW Energy, Omaxe, DB Corp, Indiabulls Real Estate, Reliance Power, Aurobindo Pharma, Jain Irrigations etc. among others, data from Elara Capital showed.
The brokerage firm recommends investors to avoid stocks with (a) an increase in pledge shares in 3 out of 4 quarters; (b) significant pledge (>40%); (c) year-on-year decline in promoter holding.
Stocks which fit all 3 criteria are Max Financial, Zee Entertainment, Adani Ports and Omaxe.
On a QoQ basis, 12 companies saw an increase in promoter pledge accompanied by a decrease in promoter holding. Among them, Elara Capital recommend investors to avoid stocks with high promoter pledge namely India Cements, Max Financial, Jindal Stainless, and Jindal Stainless Hisar.
Usually, pledging of shares is done by the promoter group as the last resort of raising fund. High pledging of shares can result into a disaster for the retail investor if the lenders start selling the shares in the open market which was the case with some companies which saw vertical fall in a single day.
Pledging of shares indicates a weak cash flow of the company and its inability to meet short-term requirements.
“In such a scenario where the holding becomes lesser that will eventually affect the ability of promoter to make a decisive decision in jeopardy. But eventually, if there is a decrease in pledging ratio over a period of time then it is a good sign for the company,” Ritesh Ashar, Chief Strategy Officer at KIFS Trade Capital told Moneycontrol.
“Companies with high pledged shares could come under pressure and a retail investor could be in trouble if the lenders start selling the shares if the company is not able to meet the margin requirement. But, if the company has increased cash flow and good future prospects then pledging can help in enlargement of the company and will help the company to carry out new projects which will ultimately result in amplified future revenue,” he said.
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