PLEDGED SHARES - NO LONGER THE NIGHTMARE
By Ruma Dubey
When you start selling your family gold and silver, especially when all know that you are otherwise leveraged to the hilt and are facing a tight liquidity crunch, surely it means that you have hit rock bottom, as far as your financials are concerned. That is how we view things in personal day-to-day life.
What about companies then? There are many who had borrowed to the maximum limit possible and then pledged almost their entire promoter stake – its like silver and gold in the family, right? Liquidity crunch, high working capital needs and difficult macro factors had led to rising pledged shares, a nightmare for companies and shareholders.
But if one notices, we are using the word ‘had’ which is a past tense. Things are slowly but surely looking up for the promoters who had pledged shares to the hilt. A survey conducted by a leading newspaper, Livemint of 379 private sector companies of BSE 500 has indicated that the proportion of pledged shares has been falling consistently. The survey has shown that aggregate promoters’ pledged shares as a percentage of total shareholding fell to 17.85% as at 3oth Sept 2014 compared to 18.20% at end of 30th June 2014.
A further break-up has shown that of the 379 companies, 253 had no pledged shares and six companies alone dominated the 90% pledged shares. This included highly leveraged companies like Alok Industries, Essar ports, Suzlon Energy, Lanco Infratech, ABG Shipyard and Parsvnath Developers. As one can see, the sector which dominates ‘troubled’ is the infra space.
So how come share of pledges shares is coming down when interest rates continue to remain high? Well, it’s the other ‘high’ factor – the stock market. To understand that, lets look at the scenario when markets fall. When stock prices crash, promoters with pledged shares could get margin calls from the lenders with whom they have pledged shares. Pushed into the corner, promoters have only two options – either repay a part of the loan or get more collateral by pledging more shares. If they do either, they manage to save the day. But when they are not able to do either, the lender is then forced to dump the shares. This brings down the stock price further. On the other hand, when stock prices rise, automatically the collateral required for existing loans comes down and promoters have the leeway to withdraw some part of all their pledged share, depending on the percentage of shares pledged. Thus a rising market means promoters opt to either pay off the loans or sell some of their stakes.
The surprising find from this survey is that realty major HDIL is deleveraging really the best and so is IRB Infra but on the other hand, companies like Sun Pharma, Gitanjali Gems, Shrenuj & Co, Lakshmi Vilas Bank, Rasoya Proteins have increased their share of pledged shares. These findings are a direct reflection of the state of the sector in which they are with gems and jewellery, along with infra, showing a lot of stress.
Keeping a tab on pledged shares is very important as it gives us a direct insight into the financial health of the company but then again, one should not base the entire investing decision of pledged shares alone. For eg: JP Power has released its pledged shares but it remains leveraged to the hilt. Or for that matter, DLF. It is drowning in debt but not a single share of the promoters is pledged.
So the big question – should one invest in companies where promoting are withdrawing pledged shares? It’s most certainly a positive but not a sole decisive factor. While investing always keep an eye on the size of the company. The bigger the company, the lesser are the chances of the company defaulting on paying the margin money. It is not just the size of the company but also the underlying fundamentals; nothing can be above fundamentals. And by this logic, mid cap and small cap stocks are higher risk. Promoters of many such small companies pledge shares in plenty to raise money but their chances of reneging on their commitment is higher. Pay attention to the percentage of shares pledged. Higher the stake of pledged shares, higher is the risk and vice versa. But above all the bottomline is – simply do not invest in highly leveraged companies.