Red flags appear in the S&P BSE 500 index as a percentage of pledged promoter (majority shareholder) holdings increased to 2.52 percent in the September quarter from 2.47 percent in the June quarter, data showed.
Outstanding promoters pledged shares were Rs1.73 tn, which is about 1.24 percent of the total BSE-500 Index’s market capitalization at the end of September, Kotak Institutional Equities said in a report.
Pledging shares helps them raise working capital to run their companies’ day-to-day business. Promoters also use the pledging route to raise funds for business expansion.
“Recently data from rating agency on Q2FY20 suggest that most of the banks are avoiding lending to corporate loans and MSME due to rating downgraded by agencies and stricter lending norms,” Jitendra Upadhyay, Equity Research Analyst at Bonanza Portfolio Ltd, told Moneycontrol.
“Most of the corporate loans came into GNPA also recently government have announced corporate tax rate cut because of this reason also most of high paying tax company rallied more than 10% due to this reason value of holding promoters increases and promoters may utilized their shares as collateral to raise money or fund from bank and Financial Institutions,” he said.
Promoters of 110 companies among BSE-500 Index have pledged their holdings. Seven companies had more than 90 percent of their promoter holdings pledged while 30 companies saw a rise in promoter pledge holding from 0.6-71 percent sequentially, data showed.
Companies that witnessed a rise in promoter holding include names like JSPL, JSW Energy, Ajanta Pharma, Max Financial Services, DB Corp, Future Retail, Emami, Reliance Communications, YES Bank, ZEE Entertainment, and Future Lifestyle.
SEBI recently revised disclosure norms on August 7 for pledged shares to include all direct and indirect pledges of promoters versus only direct pledges earlier.
Kotak clarified that pledging of shares does not necessarily imply that a company or a promoter is under financial stress; banks (lenders) could have sought additional security in the form of promoter shares.
Theories suggest that high percentages of share pledges by promoters are not considered a good sign. In case of a sudden fall in the market, it could bring down the value of shares pledged.
“Rise in pledge could be due to the recklessness of promoters themselves who had borrowed funds for use in their personal capacity (business purposes) and had pledged listed company shares,” Umesh Mehta, Head of Research, Samco Securities, told Moneycontrol.
“There is no doubt that companies with a double-digit increase in pledge holding are more prone to risks. As there is a higher amount of risk attached to such stocks, they automatically become vulnerable to market fluctuations,” he said.
Why Promoters pledge shares
Promoters take loans (either for personal purpose or for the company) against their holding in their companies from various financial institutions, wherein the promoters’ shares act as collateral.
Pledging of shares to raise finances for the operations of the company is not a bad practice per se. But, in a volatile market or muted demand scenario, stock prices of the companies may start falling
“In this case, promoters have to pledge additional shares as collateral. In many cases, continuous fall in stock prices may trigger the selling of shares by the lenders thereby further bringing down the stock price,” Ajit Mishra, VP Research, Religare Broking, told Moneycontrol.
“Hence, shares of companies with high pledged promoter holding tend to witness higher volatility. Generally, if pledged shares are more than 50% of the total promoters’ holding it should be viewed as a warning sign by the investors,” he said.
There are as many as 18 companies with the 30-50 percent pledged holdings by promoters as a percentage of total holdings that include names like Future Retail, Max India, Omaxe, Gayatri Projects, Dish TV, and Jindal Stainless.
Fall in Pledge Holding
Companies that saw fall in pledge shares include names like JK Tyres, Centrum Capital, Infibeam, and Gateway Distriparks, Swan Energy, Adani Transmission, and Granules India etc. among others.
The next big question is can these companies are worth a buy? Atish Matlawala, Sr Analyst, SSJ Finance & Securities, has told Moneycontrol that promoters releasing the pledge is definitely a good sign, but the investor must look at other fundamentals of the company before investing.
“But, it is not advisable to make an investment decision only looking at promoter pledge,” he said.
Even though promoters might have reduced their pledge holding, it would not be enough for the companies to come back on buyers’ radar.
“Only during super bullish stages these stocks attract the attention of traders and investors and can come back on buyers’ radar,” says Mehta of Samco Securities.
“It is because of the risks attached to them that they remain at reasonable valuations otherwise during frenzied bull markets people forget the risks and buy them at the peak on the pretext of undervaluation. Therefore, such stocks will largely underperform in a substantial period of time,” he said.Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.