core sector communique

Promoters rush to redeem pledged shares



The battering received by scrips of GTL, Orchid Chemicals and S Kumar's Nationwide due to pledging of shares by promoters seems to be fresh in the minds of other promoters who had pledged their company shares.

Promoters of a score of companies including Tata Consultancy Services, Cimmco Birla Ltd, Hero Honda, Chowgule Steamships, IRB Infrastructure Developers', D.S. Kulkarni, Cinemax and Plethico were seen revoking their pledged shares in the last few weeks.

“Promoters had never thought of a situation earlier, wherein they expected a run on their stock and when cases such as GTL, Orchid Chemicals and S Kumar's Nationwide happened, they were alarmed,” said Mr Prakash Diwan –Head Institutional Equities Networth Stock Broking.

“If interest rates peak out in the next two quarters, cost of debt funding would become cheaper and with growth slowing down companies have become more practical while deploying funds.”

Experts say that pledging is no more perceived as a safe mode of raising money as they have just experienced the cost attached to the lien on their shares.

“Even with a tight funding environment around, there is a feeling among promoters that it is better revoke the pledge using funding from outside rather than facing a run on their shares,” said Mr. Abbas Merchant, Sr, AVP-Research, Jaypee Capital.

It is common for lenders to take a portion of the promoter's shareholding as a pledge whenever they disburse loans to companies. “Though there is nothing wrong with this prima facie, it becomes a problem when it is mis-utilised,” said Mr. Ajay Parmar, Head –Institutional Research, Emkay Global.

“Ever since pledging of shares has been seen by the market as controversial, people have started revoking their shares and swapping it with other obligations,” he added.

Improved cash flows could be another reason why pledges are being revoked, said experts.

“Since a pledge is used as collateral to their borrowings drawn down from banks, there are cases of companies repaying these loans and revoking the shares pledged,” said the Head of Research of an Indian brokerage.

It is time promoters start additionally disclosing on how they raised money to revoke a pledge instead of just reporting that a pledge has been revoked, said experts.