Articles

Pledged Holdings by promoters drop in June 2018 quarter

Publish Date: 9th August, 2018

Promoters of listed companies seem to have improved their financial status. An analysis on pledged holdings of BSE-500 shows that there is a sharp decline to 6.8% of the total promoter holding in the quarter to June 2018, the lowest in 9 quarters. This was 7.4% in the March 2018 quarter.

It is easier to read about the pledged holdings of a promoter in a company using an annual report. You can read about the important things that you need to look out for in an annual report here.

What is pledging of shares?

Very often, promoters of listed companies pledge their shares to secure bank loans. These shares are offered as a collateral. While the ownership is retained by the promoters, banks have the right to sell shares in case the borrower defaults.

You can read all the rules applicable for share pledging here.

Why do promoters pledge shares?

Promoters need money for both, personal and business reasons. However, in order to retain their ownership, promoters are required to hold shares in a majority. If they raise funds by further selling their shares in the open market they will lose their ownership. Therefore they, raise funds by pledging their shares in exchange for loans.

Generally, banks lend an amount which is less than the market value of a promoter’s shares. This difference in amount is what banks retain as security margin. In the case of market volatility, if the share price plunges, promoters are required to offer more shares. In case, the promoters fail to restore the banks collateral limit, banks can sell the shares. Sometimes, shares may be pledged by the promoters for non-business purposes.

Similarly, reversal of pledged holdings by the promoters can be considered positive for the investors.

You can read here about what makes promoters pledge shares.

Market Implications

Higher share price volatility is often witnessed in companies with high pledged holdings. In India, SEBI has made it compulsory for listed companies to disclose information on pledges made by promoters. Now, you might be thinking, why do I need to know about pledging? Here’s why?

You invest in a company by buying their equity. When promoters pledge their shares, investors become insecure about the company’s financial health. This will lead to a fall in share prices. With the fall in share prices, banks would require the promoters to top up their collateral by pledging more shares. And, the fear of lenders selling the collateral, makes the investor feel vulnerable. This could also trigger distress sales. Promoters may even lose their management control over the company.

Therefore, before you buy a stock, don’t forget to look at pledged holdings by its promoters.

To read more about how you can analyse the share market, click here.

Also read:

• Economic data: 5 things that the numbers say
• 4 macro-economic factors that can affect corporate profits in FY18-19
• Three trends in the Indian IPO market
• 5 ways to hedge against a small-cap crash
• Quarterly results snapshot: find out how different companies performed on 25 July 2018