In India, promoters are major shareholder group that manages day-to-day affairs of company. When they need money promoters of listed companies pledge all or some of their shares with lenders. It means that these shares are offered as collateral to banks in exchange for loans. This is one of sources of borrowing money especially in volatile market with tight liquidity conditions.
Here are few things to know about pledging of promoter shares
In companies pledging of shares is common where promoter holding is high. While pledging shares ownerships retained by promoters. But promoters often use shares owned by them as for loans.
Promoters pledge their shares to raise debt for their business and they planned for future growth. So it can be raise working capital loans or long term loans to increase their holdings in the company. But promoters equity stock is their asset and they can utilise amount raised in any way. It is a good sign as long as fund are utilised for same company.
Thus if funds are used for personal reasons which will not benefit the company. In such scenario, it is important to know what is risk associated while investing in high pledge companies. You must identify risk volatile while investing because when promoters pledge their shares to raise loans it can impact on stock price.
If pledged share are liquid then price can fluctuate when trading on exchange. And that stock price goes down for certain limit then promoter has to pledge additional shares to maintain value.
In case promoters fails to pledge additional shares when required then lender right to sell pledged stock in open market to recover outstanding loan value. So it can impact on stock and prices become more volatile and if there are no immediate takers then stock prices crash.
It is common for promoters to pledge their share to raise debt capital but when they pledge significant portion of their ownership is danger for company.
Higher the pledging can be greater risk of volatile in company share price. This is because as share prices fall then overall value of pledge falls. This put pressure on promoter to produce more assets as collateral. Sometimes lender may also force to sell some of shares to ensure that loan does not turn into bad loan. If the promoter is unable to repay then ownership of shares is transferred to lender and they sell it to recover loans.
If you have knowledge about your financial then you can own shares and everything will be fine if company is continue to grow. But by size most companies have high promoter pledge shares are small and mid-cap size.
As of 11 August, promoters of 3141 companies had pledge holdings and it stands at Rs.2,48, 181 crore. Also company liquidating promoters pledged shares in open market can impact on future which can be referred to SEBI in case of grievances.