What is Pledging of Shares?
Pledging of shares is defined as depositing shares as collateral against loans from banks or any other lenders. In other words shares are used as security against which money is borrowed.
Investors especially retail ones need to look at pledging of shares by promoters of companies carefully before investing as it can be a cause of worry.
A high percentage of pledged shares can cause concerns in both rising as well as falling markets. It can be a source of volatility in price movements. If markets are on the decline and the stock price falls, the overall value of the pledged share also falls. Then the lender may ask the promoter to increase the collateral against loan value so the promoter may have to pledge further shares to makeup for the reduced margin.
If the lender takes ownership of shares, then they may sell it to recover loans which will increase the supply of the shares and thereby reduce price of the stock further and which can hurt investors.
In rising market scenario if pledged stock price rises without fundamental improvement in earnings or loan repayment capacity then investors need to be more cautious about these stocks
Hence it is very important for investors to track pledging of the stock by the Promoters. Investors need to check for what purpose promoters is pledging the shares, how is the company’s performance after pledging? If the company utilises the borrowed money against pledged shares efficiently and is transparent, resulting in growth in earnings then it can be positive for the company stock price.
The June 2016 RBI Financial stability report shows pledging of shares has increased.
RBI FSR (Financial Stability Report) on pledging of Promoters’ Shares
In India promoter ownership is high followed by FIIs and domestic investors. Chart 1.The percentage of shares pledged by promoters as % of their holdings in all listed companies across NSE and BSE shows uptrend over the last three years with promoters’ pledged shares (among all the listed companies at BSE and NSE) has increased from 11% of the total number of promoters’ shares in March 2013 to around 15% of the total number of promoters’ shares as on March 2016.
Around 33% (1539) of the companies listed on NSE had instances of pledging of promoters’ shares as on March 2016.
As on March 31, 2016, among all NSE-listed companies whose market capitalisation exceeded Rs 100 billion, the percentage of promoters’ shares pledged was 4.2% which is unchanged since March 2015.
As on March 2016 TCS promoters had pledged 3.15% of total Shares held, Asian Paints promoters pledged 13.19% while Arshiya Ltd promoters pledged 100% of their stake.