Share pledge for survival

Mumbai, Feb. 25: Promoters of stressed companies are increasingly pledging their stock with lenders to buy more time — and hopefully ride out the economic slowdown.

A note from Morgan Stanley says the promoters of 34 companies have pledged their entire holding in their companies with lenders in the quarter ended December 31 last year.

The note said the value of these pledges accounts for at least $800 million. Some of the companies that fall into this category include Gokaldas Exports, Essar Shipping, Essar Ports, Pipavav Defence, K.S. Oils, NRC and Subex.

The investment banker, which pored over the pledges disclosed by 763 companies during the December quarter, said the pledged value as a percentage of the market capitalisation of the stocks of all the listed companies was unchanged from the previous quarter at 8.6 per cent. However, the total value of pledged stocks was $23 billion, a rise of 15 per cent on a sequential basis.

In rupee terms, the total pledged value stood at Rs 1.44 trillion, a 14 per cent jump over the September quarter.

The promoters of 16 companies had pledged 99 per cent of their holding with institutions.

Market experts said there had been a disquieting increase in the trend in the past three years of promoters pledging shares. Shares are generally pledged with lenders to raise funds for personal or business purposes.

While the margin requirement varies from project to project, the sources added that as banks had turned more cautious because of the economic slowdown, they were demanding more collateral, thereby leading to a higher instance of share pledges.

In the past, there have been cases of a rise in pledges also on account of a fall in the share price as the promoter had to make up for the diminution in the value of the originally pledged shares with an additional passel of shares.

“Assuming a 50 per cent margin, the bank credit to these promoters at $11 billion was 1.18 per cent of outstanding bank credit,” Sheela Rathi, Ridham Desai and Utkarsh Khandelwal of Morgan Stanley said in the note.

The quarter saw consumer staples and energy witnessing the biggest decline as a percentage of total pledged value even as it rose in segments such as utilities. However, consumer discretionary, followed by energy, witnessed the biggest pledging by promoters in terms of value as well as the most widespread promoter pledging.

On the other hand, as a percentage of market cap, pledging was highest for energy and utilities. In terms of percentage of promoter holding, pledging was the highest in the energy sector and the lowest in technology, the Morgan Stanley note added.