INSUBCONTINENT EXCLUSIVE:
NEW DELHI: June quarter was marked by continued battering of midcap and smallcap stocks
This period also saw RBI raising policy rate for the first time since the Modi government came to power.
Thus, a reduction in promoter share
pledges as percentage of total promoter holding to 6.8 per cent in June quarter from 7.4 per cent in March quarter has puzzled many on Dalal
Street.
While there could be a few cases of promoters cutting down on their pledges amid a fall in stock prices and exclusion of many
companies with high promoter share pledges from the BSE500 index for which the figure was arrived at, yet all of that do not quite explain
the large 60 basis points drop.
Kotak Securities in a study identified a few names like KPIT Technologies, Advanced Enzyme, Apollo Tyres,
Century Textiles and Bombay Burmah, where promoters reduced share pledge levels on a quarter-on-quarter basis.
Share pledging is part and
parcel of corporate finance
Company promoters regularly offer their shareholdings as collateral to lenders to secure funds for working capital requirements or to fund
acquisitions or personal needs.
Share pledge levels do not necessarily imply that a company or a promoter is under financial stress, says
But a falling market may create problems
When the stock market corrects, the value of such collaterals generally drops, triggering margin calls, when the promoter concerned is
required to increase share pledges.
If a promoter fails to make up for the margin, the lenders can sell the shares in the open market to
This can lead to a drop in promoter holding in a company, leading to further value erosion in the stock, and thus creating a vicious
cycle.
In extreme cases, where share pledge levels are too high, such situations may even lead to a sudden change of guard in a company due
of a shift in shareholding pattern.
But the opposite happened in a falling market in June quarter, when the BSE Smallcap index fell 6 per
cent and BSE Midcap index 3 per cent
No company promoters revoked their entire pledged holdings during the quarter, says the Kotak report
CG Power and Industrial, Reliance Naval and Engineering, Suzlon Energy and ILFS Transportation Networks were the four companies whose
promoters had more than 95 per cent of their holdings on pledge at the end of June quarter
On the other hand, Indiabulls Real Estate, Granules India, Laurus Labs, Adani Transmission and Kwality saw the biggest rise in promoter
share pledges.
In the case of Indiabulls Real Estate, Laurus Labs and Radico Khaitan, the promoters actually went for fresh share pledges
during the quarter.
At the end of June quarter, the total value of promoter share pledges stood at Rs 1.82 lakh crore, which was about 1.37
per cent of total market capitalisation of the BSE500 companies.
