The pledge dilemma: FairWealth Securities

Pledged shares have rocked the markets this week — on Monday 20th June 2011 speculation over GTL Infrastructure’s lenders selling the company’s stocks caused a big fall in the scrip; on Tuesday 21st June 2011, Orchid Chemicals and S Kumars suffered the same fate.

 In the case of GTL group companies and S Kumars, while GTL fell 60 per cent, GTL Infra was down 40 per cent. S Kumars declined 28 per cent in a single session in intra-day trade. K S Oil too fell over 30 per cent. Promoters of GTL and S Kumars denied that shares pledged by them were being sold in the market,

Bulk deal data for GTL shows that seven private holding companies — Green Ridge Properties, Cosmo Advisory Services, Reckon Trading, Aerolite Advisory Services, Cross Link Trading, Plasma Advisory Services and Savyasachin Estates — together sold 5.6 million shares. This is roughly 40 per cent of the total delivery volume of 10.28 million shares traded on Monday.

Margin funding has been responsible for crashes in small and mid-cap stock prices in the past too. In Dec, 2010, investors were trapped in the counters of Ruchi Soya, K S Oil, Ackruti City,Karuturi Global, Glodyne Technoserve, Shree Ashtavinayak Cine Vision, Welspun Corp, Parekh Aluminex, Midfield Industries, Money Matter Financials, Comfort Intech and SVC Resources after brokers started offloading them. Some of these were kept as collateral either promoters or large traders.

Promoters of as many as 782 listed companies have pledged a massive Rs 1,53,000 crore as collateral to rustle up cash for various activities, indicating the absence of a vibrant corporate bond market in the country.

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