Some firms create value using funds raised via pledging of shares, finds ISB study

Our Bureau Hyderabad | Updated on September 08, 2021

Biz school calls for holistic study on this complex issue

Various scandals, loss of control of the firm by family promoters, regulatory responses and warnings have led to a common perception that all share pledges by promoters are bad.

However, a study by ISB, using data from 1,492 National Stock Exchange listed firms from 2009 to 2019, found that some firms, such as Apollo Hospitals and Asian Paints, have utilised share pledging by family promoters as a tool to raise capital for strategic projects and create value for the stakeholders.

Existing empirical research around pledging of shares is sparse and does not account for heterogeneity among possible use-cases of capital obtained from pledging of shares. The ISB study calls for more nuanced studies on pledging to explore this anomaly contextually and avoid painting all cases with the same brush.

The study, authored by Dr Nupur Pavan Bang, Professor Sougata Ray, Nandil Bhatia and Professor Kavil Ramachandran of the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB), highlights prevalence of share pledging in India and possible implications for stakeholders, especially in family firms.

Sougata Ray explains, “The commonly peddled negative narrative on pledging often dissuades balanced debates on its utility, causes and consequences, backed by rigorous research in spite of its ubiquity in India and many other economies of the world.”

The study was released in a webinar in the presence of Dr Satyanayana Chava, Founder and CEO, Laurus Labs; and Professor Prasanna Tantri, Executive Director, Centre for Analytical Finance, ISB. It has implications for investors, regulators (SEBI & RBI), board of directors, even family members. Pledging of shares, coupled with bad decision-making and/or over-ambitious growth plans, resulted in destruction of wealth in many family firms.

Legitimate fund raising

Dr. Nupur Pavan Bang said, “The study provides a clarion call for acknowledging that pledging is an important tool to access financial capital for family promoters.”

It has insights for RBI and SEBI to take a more balanced view of pledging when making policies.

Published on September 08, 2021

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