Norms fail to curb rise in pledged shares

Mumbai: Despite Sebi tightening norms, promoter pledged shares continued to rise with BSE 500 companies have seen percentage of pledged promoter holdings increasing during September quarter.

Analysis shows that pledged holding of BSE 500 stocks have gone up to 2.52 per cent in September 2019 against 2.47 per cent in the June ‘09 quarter.

And the outstanding promoter pledged share were at Rs 1.73 trillion which is about 1.24 per cent of the BSE 500 index market capitalisation.

Among BSE 500 companies, 110 companies’ promoters have pledged their shares, while in 7 of these companies more than 90 per cent of the promoter holding is pledged.

Sebi recently tweaked the disclosure rules for pledged shares to include all direct and indirect pledged shares of promoters as against earlier norm of disclosing only direct pledges.

The regulators have tightened the rules after it was found that some high profile companies like Zee group, Yes Bank and Sun Pharma promoters circumventing norms to raise funds from mutual funds and NBFC by structuring loan against shares as debt instruments with rating agencies giving high ratings.

Mutual Funds were forced to cut their lending to promoters after Sebi increased the equity cover that mutual funds take as collateral to four times as against earlier practice of  keeping cover worth 1.6-1.7 times the loan amount. RBI stipulate that NBFCs could lend to promoters if the collateral shares are at least two times the loan amount.

Companies that witnessed a rise in promoter holding include names like JSPL, JSW Energy, Ajanta Pharma, Max Financial Services, DB Corp, Future Retail, Emami, Reliance Communications, YES Bank, ZEE Entertainment, and Future Lifestyle.

There are as many as 18 companies with the 30-50 per cent pledged holdings by promoters as a percentage of total holdings that include names like Future Retail, Max India, Omaxe, Gayatri Projects, Dish TV, and Jindal Stainless.

Companies that saw fall in pledge shares include names like JK Tyres, Centrum Capital, Infibeam, and Gateway Distriparks, Swan Energy, Adani Transmission, and Granules India etc. among others.

Many promoters pledge their shares to secure funds to bankroll other ventures or acquisitions. However when the share price keeps fluctuating, the value of the collateral also changes. When the value of the shares pledged with a lender falls below a certain level, it triggers ‘margin call’, requiring the promoters to make up for the shortfall in the value of the collateral.

Recently in some cases promoters were not able to cough up additional funds leading to lenders offloading shares in the open market leading to sharp fall in share prices.