Pledge Shares – Rope tied to kneck of a hanging person

June 24, 2011   ·   0 Comments

Pledged shares have once again become a very bad word. And what was being viewed as merely a ploy by bear cartels, is catching wind and threatens to blow into a raging fire.

www.stockssavvy.comWhy this sudden news about pledged shares? The worry is that in companies where promoters have pledged more than 25% of their shares, there is a possibility that given the low prices, the promoters might opt to sell out. Traders say that there is a bear cartel too at work. How this works is that by floating negative news, they hammer down the future prices, which in turn naturally, gets down the stock prices too. And when stock prices crash, promoters with pledged could get margin calls from the lenders with whom they have pledged shares.  Pushed into the corner, promoters have only two options – either repay  a part of the loan or get more collateral by pledging more shares.  If they do either, they manage to save the day. But when they are not able to do either, the lender is then forced to dump the shares. This brings down the stock price further. And this is precisely what the bear cartel wants – they will go home with a neat pile of profits.

Take the case of S Kumars. The promoters have pledged 83.06% of their stake with a bevy of nationalized banks. Rumours were abound that they might sell off the shares. The stock was down yesterday by 12%, falling almost 28% in intra day.  Ditto with Orchid. 79.9% promoter’s stake is pledged and the stock was battered down 11%, falling 18% during intra day. There were others too – Suzlon, Unitech, Pipavav, India Cements, Ansal Properties and many more.  There are around 210 companies where promoters have pledged more than 50% stake of which, during the last one week, 49 fell more than 10%, 15 have fallen more than 15% and four have fallen over 20%.

S.Kumars issued a clarification today and the stock recovered. All this is very similar to what happened with GTL and GTL Infra a day ago. Rumours seemingly emerge out of nowhere and the stock prices get mangled to pulp, only to recover after the management issues a clarification.

One cannot brush off this entire thing as a bear cartel thing. We need to give credence to this issue of pledged shares and see if there is indeed a risk of lenders selling off. With rising interest rates, the pressure has mounted on the promoters and on the NBFCs.  NBFCs typically fund high risk but at a high interest rate.  There is worry that many promoters might not have the pay back the borrowed money and NBFCs might begin to sell off as their cost of funding too has gone up.  Today, Cholamandalam sold off 20.55 lakh shares pledged with it by MIC Electronics. And somehow this news makes these fears seem real and not a concoction of the bear cartel.

www.stockssavvy.comIn Feb 2009, in the aftermath of the Satyam scandal, SEBI made it mandatory for promoters to disclose the number of shares pledged by them – details of pledged shares if the same exceeds 25,000 shares in a quarter or 1% of the total shareholding or voting rights of the company, whichever is lower. But we now apparently need more information, more transparency.  The current circumstance should ideally force SEBI to ask companies to give information about the lenders with whom they have pledged their shares. And information on margin funding would also help clear the air. Currently we do not know where the shares are and we do not know if the sudden sale will trigger of a sell off. And that is vital information, which we ought to know.

Let us not wait for a crisis for proactive change. Hope SEBI gets cracking and culls this hydra headed monster of pledged shares before it eats up the indices.

Food for thought: A pledge is a chain that is always clanking and reminding the wearer of it that he is not a free man

Source: Premium Investment

Rajesh Singla

Rajesh is the founder & CEO of Stockssavvy, Stocks analyst,financial advisor by choice,software engineer by fate,biker,gamer,cricket lover n enthusiastic person. He believes in doing things not just to get by but to get Ahead...

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