Rise in promoters pledging shares sign of stress in high-capex sectors

A tight-funding environment has made promoters increasingly resort to pledging the shares owned by them to raise money. Stocks of such companies are considered more vulnerable and can witness sharp declines if financiers sell the shares given as collateral.

The number of NSE-listed companies where promoters have pledged shares increased from 486 in December 2014 to 517 in December 2015, according to PRIME Database. Promoters of about a third of the CNX 500 companies had pledged their shares towards the end of last calendar.

Companies primarily from the capex intensive infrastructure and related sectors have been witnessing the most stress. For instance, 93.3 per cent of promoter holdings in JP Infratech, which accounts for two-thirds of the company’s outstanding shares, were pledged as of December 2015. Likewise, over half of Gammon Infra’s shares were pledged. Pledging levels are also high among realty companies such as Parsvnath Developers.

Other sectors such as sugar, construction, power, engineering, ports and metals, which are also facing high debt, saw increasing pledge levels. In the December 2015 quarter, JP Associates and Adani Ports were among the firms that saw a sizeable increase in pledged shares. Other names include Ashok Leyland and Apollo Tyres.

Data from Ambit Capital show that promoter share pledging continued to rise in January as well. Dish TV, Jindal Steel and Jubilant Foodworks were the top three stocks that saw a significant increase in pledging activity. Dish TV, for example, had 72 million shares, or about 6.7 per cent of all outstanding shares, pledged in January, in addition to the 31.4 per cent of overall shares that stood pledged as of December 2015.

Worrisome trend The trend of increasing pledging is worrisome for a few reasons. One, it indicates that companies are facing limited funding options and high borrowing costs, says Yogesh Radke, Head of Quantitative Research, Edelweiss Securities. Share pledges are seen as an easy way to raise funds for short-term capital requirements.

Two, credit agencies may not take a favourable view of a high level of promoter pledging. “If an excessively high proportion of a promoter’s stake is pledged, it could signal that the promoters’ financial flexibility is limited,” says K Ravichandran, Head, Ratings, ICRA Ltd. He notes that unless pledging was to meet certain covenants of lenders, the cases where it is used to raise funds outside the company must be thoroughly evaluated.

Three, when the market falls, the stock price of companies where promoters have pledged shares may face higher volatility. This is because of investor concerns about whether promoters have enough buffer funds to meet margin requirements.

A recent example is Tree House Education and Accessories, which had 43 per cent of promoter shares pledged as of September 2015. When the stock price dipped, margin call worries accelerated the fall — from about ₹400 in early September to ₹150 in early December — leading to the promoters selling nearly 10 per cent of their stake to redeem the pledge in early December.

Radke notes that companies with high pledging levels in the construction and infrastructure sector, which includes power, ports and engineering, seem highly vulnerable currently in the event of a further decline in the markets.

COMMENT NOW