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Thursday, January 29, 2015

Promoters cut pledged shares as stocks rally
Volumes fell in 39 companies and rose in 34 during Oct-Dec
Photo: The Indepndent
Mumbai, Jan 28 2015: Promoters of companies and business conglomerates, like Anil Ambani and the Jindals, have revoked large volumes of pl­edged shares following the sharp gain in stock prices over the past few months.

On the contrary, there was a rise in share pledges by promoters of many midcap companies during the December quarter.

Share pledge is a popular and convenient fund raising option among company promoters, who mobilise credit from banks and other financial institutions by mortgaging part of their shareholdings.

There was a rise in share pledges in recent years as companies struggled to raise cash amid rising interest rates, credit squeeze in the banking system and a slowdown in businesses that curtailed cash flow.

But the quantum of shares pledged by various companies, especially lar­gecap firms, have come down sharply over the past few months as share prices moved up.

Anil Ambani group companies — Reliance Capital, Reliance Infrastructure, Reliance Communication and Reliance Power — have seen pledged share volumes drop substantially. 

In Reliance Infra and Reliance Communication, the entire volume of pledged shares was revoked during October-December. Reliance Infra had a 27.03 per cent stake on pledge, while Reliance Communication had 13.94 per cent at the end October 2014, data available on the BSE website shows.

In Reliance Capital, the volume of pledged shares has come down from 33.09 per cent in October, 2014 to 21.81 per cent at the end of December, 2014, while in case of Reliance Power, it has fallen to 8.91 per cent from 22.58 per cent.

Among others, Jindal Steel and JSW too have seen a drop in promoters’ pledged shares. Pledged share volumes declined in 39 companies and rose in about 34 others during the October-December period.

“Many promoters mortgaged their shares in the past few years to tide over liquidity crunch, raising pledged share volumes substantially,” said Harish HV, partner at Grant Thornton. So much so, at one point it had become a cause of concern, especially when the stocks were falling.

In more than 20 companies that are part of the BSE200 index, promoters’ pledged shares as a percentage of their total holdings was in excess of 70 per cent at one point, as promoters of many midcap companies pledged their entire holdings.

Since share prices have since gone up in most cases, the amount of shares needed to be kept as margins must have also come down, he pointed out.

Banks have a margin requirement of two-three times for loans extended against pledged shares, which means promoters are required to bring in additional shares when prices drop.

There have been concerns among the regulators over the increase in promoters’ share pledges, which they feel can pose a potential threat to the financial system.

Flagging the issue in the recent financial stability report, the Reserve Bank of India (RBI) said in view of the prevalence of promoters pledging substantial portions of their holdings, the leverage could be a concern not only for the shareholders but also for the health of the financial system,”

“This issue calls for a closer examination, especially in the current scenario of buoyancy in stock prices wherein the collateral in the form of pledged shares may appear to justify higher leverage,” it said.

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