Scared financiers look to dump pledged shares

Last Updated: Wed, Nov 23, 2011 07:06 hrs
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Margin calls may have been triggered in a few cases; however, investors clueless, say experts.

A senior official in a non-banking finance company (NBFC) is a worried person. The shares of many companies whose promoters have pledged shares with his NBFC have fallen more than 30 per cent. And, their margin calls have been triggered, forcing him to sell the shares in the open market to meet the shortfall.

This senior official is not alone in this conundrum. The market is abuzz with rumours that many financiers have dumped promoters' shares pledged with them after margin calls were triggered in the past few sessions. However, most retail or high networth investors are clueless, as nothing is reported at the stock exchanges.

Market experts said disclosures like triggering of margin calls were never reported. One could only get a clue that it might have happened in situations where the promoters pledged more shares after a sharp fall in stock price. But, promoters always argue that pledging has been done for other reasons.

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"Typically, for every Rs 100 loan taken by a promoter from a financier, shares worth Rs 200 or Rs 300 are pledged with the latter as collateral. This is two-three times the loan amount," said a senior official of the NBFC unit of a brokerage house.

However, if the share prices were to fall 50-60 per cent, financiers would demand that promoters make some payment or pledge more shares to meet the margin shortfall. If the promoter defaults or is unable to provide more shares as margin, the financier has a right to sell the shares in the open market. This leads to a further slide in the stock price, as the quantity of shares sold by financiers is large.

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The rate of interest the financier charges for loans against shares varies, depending upon the liquidity in the stock. According to brokerage officials, the rate of interest is 13 per cent for liquid stocks and 16-17 per cent for illiquid stocks.

In the quarter ended September 30, as many as 772 Indian companies had disclosed pledged shares worth Rs 120,000 crore, according to a recent Morgan Stanley strategy report.

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In just seven sessions, the share prices of companies like Suzlon, Pipavav Defence & Offshore Engineering, ARSS Infrastructure Projects, Parsvnath Developers, Gati and Bilcare have fallen 25-42 per cent, according to data compiled by the BS Research Bureau. About 70 per cent of promoters' holdings had been pledged with lenders by these companies.

Promoters, however, are confident that their companies have not seen any selloff due to the margin call. Pradeep Jain, chairman of Delhi-based Parsvnath Developers, said, "There have not been any margin call triggers anywhere." Swati Raghuvanshi, a spokesperson of ARSS Infrastructure, said, "In case of such a development, it would have been on the stock exchanges."

Market experts say the selling of pledged shares often comes as a shock to investors, due to the opaque nature of the transactions between promoters and financiers. "This is a serious fundamental issue. Genuine investors are losing faith in the market due to lack of transparency," said Deven Choksey, managing director at KR Choksey Shares & Securities. "All the lending and borrowing activities need to take place on the exchange platforms. This will bring a significant amount of discipline."

It's not just the companies where a significant chunk of promoter holding is pledged that are at the receiving end. NBFC units of some brokerages are also in a spot of bother, experts say. "Some financiers are stuck with low-volume stocks. There are cases where promoters don't have any shares or cash left to meet margin requirements. This has resulted in relentless selling from financiers," said S P Tulsian, an independent investment analyst.

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