Pledging of shares by the promoter group is not new but investor sentiment has turned cautious on those companies which have a high amount of pledged promoter holding
In news that would bring cheer to investors, data reveals that promoter pledged holdings in BSE 500 constituents has fallen in value terms quarter-on-quarter.
The percentage of pledged promoter holdings declined to 2.47 percent in the April-June quarter as compared to 2.83 percent in the January-March quarter, Kotak Institutional Equities said in a recent note. Outstanding pledged shares by promoters stood at 1.73 trillion, or about 1.21 percent of BSE 500’s market capitalisation as at June-end.
Pledging of shares by the promoter group is not something new and must not be seen as a bad practice, but in the backdrop of rising defaults by companies, investors have turned cautious on such companies.
Companies often adopt such a practice to meet their liquidity needs, but at a time when the economy is showing signs of a slowdown, companies with high promoter pledge could add to your risk.
Kotak too 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,” it emphasised.
Vinod Nair, Head of Research at Geojit Financial Services, explained that a fall in pledge shares by promoters provides a sense of security and indicates an improvement in the financial position of the company.
A fall in promoter pledges is a good omen and investors must consider this as a positive signal while arriving at an investment decision. The top 30 companies in which promoters reduced their holding by over 10 percent in the June quarter include CG Power and Industrial Solutions, Sterlite Technologies, Indiabulls Real Estate, Himatsingka Seide, India Cements, Sadbhav Engineering, Indiabulls Housing Finance, Advanced Enzyme Technologies, Jubilant FoodWorks and Adani Ports.
Romesh Tiwari, Head of Research at CapitalAim, said a decline in pledged holdings combined with a fresh infusion of capital from the promoter group will generate trust and shows the promoters’ commitment towards the company.
However, any increase in the promoter pledge is to be dealt with caution. The top 30 companies in which promoters increased their pledge holding include Eveready Industries, Lemon Tree Hotel, Orient Electric, Chambal Fertilisers & Chemicals and Jindal Steel & Power.
“Investors must dig deeper to understand the reasons for the same and the magnitude of borrowing,” Tiwari said. He added that in the absence of a valid cause, investors must stay away from such stocks.
Besides the above factors, experts advise investors to check for other fundamental factors as the performance of a pledged stocks starts to depend on the feasibility of a project or speak to an independent financial expert before arriving at an investment decision.
In June, the Securities and Exchange Board of India (SEBI) has tightened rules for disclosure of pledged shares by promoters. They now will have to furnish reasons if combined encumbrance cross 20 percent of the company’s equity capital.
The tighter regulations have come as a fallout of the recent crisis faced by mutual funds, which had an exposure to their loan against share (LAS) schemes.
“Concerns arise when the financial position of the company, project or promoter get weak. Its implication magnifies when the financial circumstances of the project or economy turn weak. Investors should usually avoid such stocks given the future uncertainties,” said Nair of Geojit Financial Services.