Promoters of 30 companies reduce pledged shares in Q1; worth a look?

The pledged holdings of promoters in BSE500 companies declined sharply in June quarter to 1.95 percent of total promoter holding from 2.34 percent in the March quarter.

Promoters of 89 companies in the BSE500 index had pledged all or part of their holdings in the June 2020 quarter compared to 105 companies in the March 2020 quarter, Kotak Institutional Equities said in a note.

According to a report by Kotak Institutional Equities, there are about 30 companies whose promoters reduced their pledged shares. These include Dish TV, Wockhardt, Future Retail, Jindal Saw, Apollo Tyres and Adani Ports.

Usually, a fall in promoter pledge is considered as a positive sign, but analysts feel that the reasons for a fall in promoter pledge could be completely different.

“Generally, as a trend in a rising interest rate scenario, promoters often use shares owned by them as collateral for loans. But in order to help the languishing economy in the wake of coronavirus, RBI has been slashing repo rates, now at its lowest ever at 4.40%,” Nirali Shah, Senior Research Analyst, Samco Securities told Moneycontrol.

“Therefore, in a scenario where the economy is flush with liquidity and interest rates have fallen, promoters often tend to take the benefit. This reduction in promoter pledge was also accentuated by an increase in the price of the underlying asset pledged with the financial institution, in this case, shares pledged,” she said.

Shah further added that with the given data it can be safely concluded that reduction in prevailing interest rates along with a rise in share prices from March 2020 lows have accelerated the fall in promoter pledges in June.

The decline in the number of promoters’ pledged companies can be attributed to changes in BSE-500 constituents and the complete release of pledged shares in case of a few companies, said the report.

The value of promoter pledged holdings was Rs 1.3 trillion at the end of June. Kotak Institutional Equities clarifies 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.

Companies whose promoters pledged more than 90 percent of their holdings include names like Future Consumer, Max Financial Services, Emami, Jindal Stainless (Hissar), and Dish TV.

Rise in promoter pledge in June quarter:

The highest increase in pledged promoter holdings was seen in DB Corp., Zee Entertainment, Metropolis Healthcare, Ashok Leyland, Emami, SPARC, and Jamna Auto Industries.

Investors should ideally stay away from companies in which promoters’ pledged holdings increase. “As a thumb rule, retail investors should make note that large scale pledging of shares by promoters in either a falling or a rising market scenario is a matter of great concern as it adds substantial risks to one’s wealth creation journey,” says Shah of Samco Securities.

“Retail investors are advised to avoid investing in companies that have witnessed an increase in promoter pledges. It is safer to invest your capital in other stocks. As Murphy’s Law states ‘Anything that can go wrong will go wrong’ and the world of investing is no exception,” she said.

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