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Pledging of promoters' holdings with financial institutions has risen marginally quarter on quarter for the last two quarters of the current fiscal. Market experts attribute this to the correction that stock prices have undergone since last November, forcing promoters to pledge more shares.
Experts said that promoters usually pledge shares as a guarantee when they raise money from banks and financial institutions for requirements related to capital expenditure, replacement expenditure or working capital. The value of the pledge is usually pegged at up to three times the funds raised. When the stock price goes down, promoters pledge a fresh quantity of shares to make up for the erosion in value.
An ICICI Securities report said, in Q3FY11, percentage of promoter holding pledged has increased to 9.6 per cent from 9.5 per cent in Q2FY11, whereas percentage of total equity pledged has increased from five per cent to 5.1 per cent.
“There is nothing negative about it, if it is used for business purposes, said Mr Manish Laddha, Head — Research Ideas, 1st Research.
“Unless there is a huge spike in the percentage of shares pledged, there is very little cause for concern,” said Mr Gaurav Dua, Head of Research, ShareKhan, echoing the same sentiment.
Difficult to gauge
The motive for pledging shares is very difficult to ascertain. “For investors, to ascertain the motive for pledging shares comes only with experience, and the motive is different in every case. One has to consider reasons like who pledged, to whom shares were pledged and the like,” added Mr Laddha.
“On being asked the reason for pledging shares companies that are transparent respond immediately. In such cases, it is obvious that they are forthright and not trying to fudge facts,” said Mr Dua.
Experts point out that there is no Indian regulation which makes it mandatory for promoters to define the purpose of deployment of funds raised through pledging of shares.
In the West any such fund raising through this route for non-business purposes is dealt with by insider trading regulations.
In Q3FY11, percentage of promoter holding pledged has increased to 9.6% from 9.5% in Q2FY11, whereas percentage of total equity pledged has increased from 5% to 5.1%.
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