Promoters pledging their shares, for personal or business needs, is not new. After the Satyam scam, which revealed the promoters having pledged almost all their shares, the Securities Exchange Board of India (Sebi) had made it mandatory, in 2009, for promoters of all listed companies to disclose their share pledging activities.
During the September quarter this year, 790 companies disclosed pledges on their holdings. The pledged value as a percentage of the market capitalisation (m-cap) of stocks of these companies had risen to its highest level in four quarters - 10.1 per cent (up 27 basis points, quarter-on-quarter), says a recent Morgan Stanley India's Strategy Report (Tracking Promoter Pledging: What's at stake? by Sheela Rathi, Ridham Desai, Utkarsh Khandelwal and Amruta Pabalkar).
As of end-September, the total value of pledged stocks was $27 billion (Rs 1.5 lakh crore), up 16 per cent quarter-on-quarter (q-o-q). In rupee terms, the total pledged value was Rs 1.42 lakh crore, up 10 per cent q-o-q.
"Pledging shares is an easy way to raise low-cost funds. This is helpful if the promoter is using these for expansion," says A K Prabhakar, senior vice-president (equity research), Anand Rathi.
There have been cases where investors have resorted to panic selling after coming to know about the huge amount of funds raised by promoters through share pledging, as also by indirect pledging of shares to avoid Sebi's disclosure norms. "GTL, GTL Infra, Suzlon Energy and Zylog Systems are a few cases where the stock price crashed, once investors came to know about the promoter pledging," Prabhakar adds.
During the quarter, the financials and technology sectors saw the largest drops in the share of pledging, while healthcare and consumer staples witnessed the most gains, data from the report suggests.
At the end of the quarter, consumer discretionary, followed by the materials sector, saw the biggest pledging by promoters in value. However, as a percentage of market-cap, pledging was the highest for the utilities and the financial sectors. As a percentage of promoter holding, the percentage of pledging was the highest for energy and lowest for the technology sector, the report says.
From Morgan Stanley's coverage universe, 40 companies reported pledges (totalling $10 billion). Among Sensex constituents, nine companies reported pledges worth $2.8 billion.
"Of the 797 companies reporting pledging in June, 18 have revoked their full pledges on shares. An additional 38 reported fresh promoter pledging during September. Notably, 311 companies reported lower pledging versus the previous quarter, while 128 increased their pledging versus the previous quarter," the report says.
Around 310 companies have kept their level of pledging (in per cent) unchanged. In addition, 15 promoters increased their pledging by more than 25 per cent during September, while eight brought down pledging by 25 per cent or more. Of the 790 companies that have reported pledging, promoters of 254 have pledged more than 50 per cent of their holdings.