Founders of one-third listed firms in India pledge shares

Founders of one-third of the listed companies in India with a market capitalisation of 1 billion rupees or more, have pledged a portion of their shareholding, a report by rating agency Crisil said.

The total pledge works out to 1.1 trillion rupees worth of market capitalisation as on Nov 18, 2011, the report said.

Of the 1,214 companies covered by Crisil, 183 firms have 25 percent or more of promoter holding pledged while 107 have 50 percent and 14 companies have 90 percent or more pledged, the report said.

SpiceJet has 86.2 percent of its founder shares pledged, while Kingfisher Airlines has 90.2 percent of shares pledged. Among other larger companies which have pledged founder shares are Gujarat Pipavav Port Ltd, Wockhardt Ltd, United Spirits Ltd and Essar Oil Ltd.

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High levels of pledging promoter holding exposes companies to "the risk of losing promoter control and also higher share price volatility if the prices fall from their current levels," the report said.

Sectors that have seen the highest promoter pledging include power, IT, infrastructure, pharmacy and healthcare, the report added.

Indian stocks have been among the worst performers in Asia with the benchmark index down 23 percent so far in 2011 due to looming concerns of high domestic inflation, rising interest rates and a worsening global economic environment.

These concerns have triggered a fall in the stock prices creating pressure on founders who have pledged shares to make good the loss in the value of the collateral.

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The capital market regulator's current guideline requires companies to disclose percentage of promoter holdings pledged.

However, there are no regulations which make it mandatory for founders to disclose other crucial details like purpose of funds raised through pledging of shares, price at which the initial pledging is made and the conditions under which the margin call will be triggered, the report said.

"In the backdrop of inadequate disclosure levels on share pledging, investment in such companies exposes an investor to severe price volatility in case a promoter is not able to meet payments or provide additional collaterals in a falling market," it said.

The report said promoters pledge shares with banks or non-bank finance companies as collateral to raise corporate loans or to raise money in their personal capacity to infuse equity in the company.

Founders of one-third listed firms in India pledge shares - Crisil