Promoter pledging hits 6-yr low, 45 cos reduce pledged shares in June; should you buy?

Overall, there were 45 companies in which the percentage of promoter holding decreased in June 2019.

The fall in pledge holding is usually a good sign that suggests improved borrowing capacity or value proposition on a long-term basis. It is usually an indication of confidence by promoter over the business that is likely to offer value at large on a longer timeframe, suggest experts. But, do they also qualify as an investment bet?

“Fall in pledged promoter holdings is a positive sign. But you should consider other parameters too, like cash flows, debt, efficient use of capital, and business prospects,” explains Dinesh Rohira, CEO & Founder at 5nance.com.

“Ideally, it should have sound fundamental that can withstand sudden economic slowdown or any cyclical headwinds, and offer a long-term value proposition to investors than just considering the promoter holdings,” he said.

Nifty 200 companies that saw a decrease in pledging were Max Financial Services, Ajanta Pharma, JSW Energy, Manappuram Finance, Adani Power, Reliance Infrastructure, GMR Infrastructure, Reliance Capital, Jubilant Foodworks, Asian Paints and Adani Ports & Special Economic Zone, among others.

However, there were 31 companies in which the percentage of promoter holding pledged increased in June 2019.

Companies in Nifty 200 that saw an increase in pledging were Jindal Steel & Power, Reliance Power, JSW Steel, Bombay Burmah Trading Corp., Aurobindo Pharma and Apollo Hospitals Enterprise, among others

265 cos do not meet new SEBI norms

Over 250 companies do not meet the newly-announced SEBI norms on pledging of shares and may have to furnish more details to comply with the diktat, Prime database said in a note.

They include JSW Steel, ZEE Entertainment, Adani Transmission, Future Retail, Adani Power, Apollo Hospitals, Jindal Steel & Power, Emami, JSW Energy and Max Financial Services, among others.

The market regulator after a meeting on June 27 put stricter norms for pledging of shares. It mandated that where pledging of promoters' shares is more than 20 percent of the total share capital of the company or 50 percent of the total promoter holding, promoters shall be required to disclose detailed reasons for encumbrance separately.

“Pledging of share is a perfect legitimate financial transaction. Problem is that many promoters pledged their shares and invested into unrelated financial assets that went sour resulting into forced liquidation of the stocks by lenders resulting into very high volatility and a sharp decline in the share price of the company,” Shailendra Kumar, CIO at Narnolia Financial Services told Moneycontrol.

“SEBI intervention in terms of asking promoters to disclose the reason for pledging is very positive as now an investor would be able to make better-informed decisions Also, it will require promoters to be more disciplined in their investment decisions,” he said.

Table: Top 10 out of 265 stocks that fail to meet new SEBI norms. The table is for reference and not buy or sell ideas.

Most experts feel investors should avoid these companies or wait for a detailed note clarifying about the use of pledge shares or why the pledge was done.

The new SEBI norms are "extremely beneficial for investors as there will be more transparency and clarity in the system,” Umesh Mehta, Head of Research, SAMCO Securities told Moneycontrol.

“Henceforth, investors should keenly check for such encumbrance details in order to take particular actions on these 265 stocks,” he said.

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