On an average, 8-9% of the promoter’s holding has been pledged during June 2009-September 2011 aggregating to 5.1% to total equity in September 2011, says ICICI Direct

On an average, 8-9% of the promoter’s holding has been pledged during June 2009-September 2011 aggregating to 5.1% to total equity in September 2011: ICICI Direct

On an average, 8%-9% of the promoter’s holding has been pledged during June 2009-September 2011, according to a report from ICICI Direct. In the quarter ended September 2011, the percentage of promoter holding pledged has increased to 9.5% from 9.1% in June 2011, whereas the percentage of total equity pledged has increased from 5% in June 2011 to 5.1% in September 2011. According to a Crisil report on the same subject, around 31% companies out of 1,214 listed ones have actually pledged shares of more than 50% of their paid-up capital.

While ICICI Direct has focussed on the increasing trend of pledged shares among promoters, Crisil has prepared a table on promoters who have pledged up to 80% of their holdings. Further, Crisil says that promoters of 31% of the 1,214 listed companies and with a market capitalisation of Rs100 crore, or more, have pledged substantial portion of their shareholding. The total pledge works out to Rs1.1 lakh crore worth of market capitalisation as on 18 November 2011.

In a falling market, pledging shares is disastrous both for promoters and investors. When market conditions are favourable, the method of pledging shares appears beneficial for promoters as well as lenders. The promoters get access to quick short-term financing, whereas lenders charge premium rates for this short-term financing arrangement. On the other hand, lenders have about twice the value of the loan as pledge of shares with a right to sell the shares if the promoter defaults in repayment, or if the value of pledged securities goes down.

The Sensex has corrected by about 20% in the last three quarters, resulting in an erosion of market capitalisation of stocks and, hence, the value of shares pledged for securing loans. In 2011, the capital markets have been highly volatile due to looming concerns of high domestic inflation, rising interest rates and tepid global economic environment. These concerns have triggered a fall in the stock prices creating pressure on the promoters who have pledged shares to make good the loss in the value of the collateral. However, investors, especially retail investors, are generally oblivious of such details, and eventually lose because of sharp fall in prices.

The ICICI Direct report gives a table of current market prices of such companies as on 22 November 2011, and investors have borne the brunt of the falling share prices and erosion in market capitalisation. Some promoters have decreased their percentage of pledged shares and have tried to solve the problem at their end and these companies have shown an improvement in three-month stock returns.

Hatsun AgroProd, where promoters have decreased their percentage of pledged shares by 4.1% quarter-on-quarter, has improved its three-month stock return to 10.4%. Strides Arcolab has improved its three-month stock return to 45.7%, after decreasing its pledged shares percentage by 1.5%. In contrast, Raj Oil Mills, where the promoters pledged shares percentage has increased by 58% quarter-on-quarter, has shown a negative three-month stock return of 45.3%.

The Crisil report has also given sector-wise data on companies with promoters, who pledge their shares, and it is observed that power generation, IT and ITeS, infrastructure, and pharma and healthcare companies have seen higher levels of pledging. ICICI Direct is silent on the sectoral distribution.