Concerns over pledged shares 'irrational', says SMC Global

There are 782 companies with pledged shares worth a total RS 1,53,000 crore. It includes cash-rich companies such as TCS and Adani Power. In this situation, it is imperative to view the issue as belonging to individual companies than as one big problem of the market as a whole, he says.

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Q: Isn’t this a bit of an irrational fear? There have been very good stocks like even TCS shares have been pledged. It doesn’t mean TCS is in trouble. It’s a cash rich company. It can redeem the pledge anytime. It’s just raising a little bit of money. Is there a certain irrationality about this fear now?

A: Absolutely. Firstly, there are 782 companies in India who have pledged the shares. All in all, the value of all the pledged shares put together is about Rs 1,53,000 crore today. By no stretch of imagination that’s a small figure. Definitely, we are talking about sizeable pledged market and sizeable pledged number of shares. That is point taken. However, it is not fair to brush the same scenario with every element since there are companies like TCS , Adani Power , Hero Honda , Bajaj Auto , with pledges. We should not see it in the same context.

Why it is happening in my personal opinion is that we don’t have a mature developed corporate bond market. So companies have to go into one of these routes to raise funds for their capex heavy projects. There are quite a few concerning situations as well like real-estate companies and infrastructure companies. That concern is always there. So it is better to see it as 782 individual cases rather than seeing it as a 1 big problem.

Q: Among the companies that have fallen over the past few days – have you spotted any company which fundamentally looks okay?

A: For example, the 4-5 names which have raised the eyebrows of the market are, GTL , GTL Infra , even the cases of S Kumars and Orchid Chemicals . All these cases are in the zone of anywhere between 50-90% of the promoter holding that is pledged. That is given.

The main problem is that whenever the market mood is bad, even a rumor is sufficient to fizzle the whole stock out. So that is the major concern. As far as the stocks are concerned I think there are some fundamentally quality companies, frontline companies like Bajaj Auto and M&M , and even companies like TCS . There is nothing to worry about these companies as such.

And one more statistics I would like to add is out of the Rs 1,53,000 crore of the total values of the pledged shares, 22% is from the Tata Group alone. That is about Rs 33, 000 crore. I don’t think anybody will worry about giving loans to Tata as such. That can be safely assumed as over stretched fear, where Tata Global , Tata Coffee , Tata Communication - everybody has pledged.

Q: There would be a difference between pledging it to brokers and pledging it to banks. From what I know of the banking sector, they are way more worried about keeping an account standard. They would not want to go and sell-off a share. On the contrary they would call up the promoter and check out whether there would be some way of redeeming it and restructuring or postponing the call. So would it make more sense even for the exchanges to ask the companies concerned to give the pledgee as well because that would make a seminal difference to the mood or to the perspective that you have towards that pledged share?

A: I think Indian regulations have to get mature on 2 aspects. Firstly, the nature of the lender and the nature of the money for which it has been used. As far as the nature of the lender is concerned with banks, NBFCs or individual financiers, it is very critical. NBFCs would look at it, pledged, and will go aggressively in the market and sell it off whenever the margin gets triggered. The way banks get built up is altogether on a different magnitude.

Secondly, the NBFCs tend to charge very high rates whenever a promoter goes for the pledge. That shows that the companies who are going to NBFCs don’t have a sort of credibility from their banker to pledge their shares. That is also another indication the market can take. So it’s very critical for Indian regulation, going forward, to nurture the nature of the lender as well as the nature of the purpose for which the money is used. It is very difficult. It is probably high time we develop the Indian corporate bond market, especially for capex heavy industries. Otherwise this problem is going to come time and again. We have seen in the last 4-5 years at least this situation coming 2 or 3 times, but every time we worry and we move on with life.

Q: One final question – would there be any specific counters that you are worried about in that list?

A: I think the whole of real-estate companies this time have not got better. For example, this time, the problem came into S Kumars and Orchid Chemicals of the world. However, even companies like Parsvnath , Ansal Housing , Ansal Properties and Orbit corporation and almost every real-estate company you can think off are anywhere between 50-100%. So that is not a pleasant percentage to be in and also the companies like Pipavav and Gujarat Port , even there are facing select set of issues.