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Pledging of shares by promoters on the upswing

Real estate, infrastructure, media cos dominate the scene.

Vidya Bala

BL Research Bureau

Many listed companies have seen a rise in shares pledged by promoters despite easier liquidity and rising stock prices.

Promoters of Unitech, United Spirits, JSW Steel, Suzlon Energy and Sun TV Network have pledged shares worth between Rs 3,000 and Rs 6,500 crore each as of June.

The number of shares pledged for these companies has gone up in the last six months. JSW Steel, for instance saw the proportion of promoters' shares pledged increase from 26 per cent to 36 per cent. Indiabulls Power's promoters had pledged 68 per cent of their holdings by June 2010. As of December 2009, the company had not pledged any shares.

For all the NSE listed companies, shares worth Rs 1.5 lakh crore were pledged by promoters in June 2010, translating into 2.4 per cent of the total market capitalisation. This is actually higher than the 2 per cent (of the prevailing market-cap) that was pledged in March 2009, when corporate India was still reeling under the liquidity crunch.

End use

Overall, more instances of pledging were seen in sectors such as real estate, infrastructure, textile and retailing and media. These also happen to be segments that require constant infusion of money either for working capital or for expansion needs.

Promoters may pledge shares to either fund the short-term requirements of their firms or for personal needs. For companies such as Aban Offshore and Suzlon Energy, an internal funds crunch could have prompted promoters to pledge shares to infuse funds, albeit for the short term.

However, promoters may also use this device to add to their stakes in companies or to help the company bankroll acquisitions.

According to Mr Motilal Oswal, Chairman and Managing Director, Motilal Oswal Financial Services, “with improved market conditions, some promoters may even be pledging shares to raise money to increase their holding in the company”.

However, according to Ms Sarabjit Kour Nangra, Vice-President of Research, Angel Broking, “Promoters may be pledging for their own personal requirements; whether pledging is a cause for concern or not would depend on the end use of funds”.

Between December 2009 and June 2010, promoters in 169 companies pledged additional shares or mortgaged their shares for the first time. Promoters may be putting up their shares for pledge taking advantage of the improved market conditions, as they can borrow higher sums in a rising market than in a depressed one such as 2008.

Promoters of companies such as Tata Steel, Gammon India, ABG Shipyard and India Infoline, however, fully revoked the shares that were under mortgage.

Lupin, Adani Enterprises and Tata Chemicals were among the companies which saw a reduction in the number of shares pledged.

The analysis did not throw up any case of lenders actually putting the pledged shares on the block. The rising market may have provided a sufficient cushion on prices to meet any obligations.

The last striking case of an institution invoking a pledge was in the case of Maytas Infra, where IL&FS started putting the promoters' pledged shares on the block from March 2009.

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