From Wockhardt to Deepak Fertilizers — promoters of these seven companies have pledged more shares last quarter
- The slowdown in the Indian economy and the COVID-19 pandemic have dried out liquidity in the market, forcing promoters to pledge their equity shares to raise money.
- While promoter pledges may not affect shareholders in a bullish economy, the Indian stock markets have had a bear run in 2020, crashing by nearly 25% this year.
- As a result, promoter pledges in several companies have gone up drastically, which can have an impact on shareholder wealth.
- In such a scenario, it is important to know what exactly promoter pledges mean and how they can have an affect on the share price of the company.
A research report by Edelweiss has identified 7 companies in which promoter pledging has changed drastically between Q3, 2019 (Oct-Dec) to Q1, 2020 (since April).
Source: Edelweiss Research
|Company||Promoter pledge in Q3 2019 (%)||Promoter pledge in Q1 2020 (%)||Change (%)|
|Balrampur Chini Mills||0||73.06||73.06|
|Bajaj Consumer Care||62.83||0||-62.83|
Out of these 7 companies, promoters of 4 companies have pledged as many as 75% of their shares. In the other 3 companies, promoter pledging has declined from 85% to 0%.
What is promoter pledging?
Promoter pledging is a way of getting a loan from financial institutions by using shares of the company as collateral.
Promoters use the equity shares they own as collateral and obtain loans from banks, non-banking finance companies (NBFCs) and others. They then use these loans to meet their requirements.
Why you should care about promoter pledges
So far, this sounds like a regular loan.
However, in the case of promoter pledges, the risk factor for both the lender and the promoters is high. This is because, when promoters pledge their equity shares to obtain a loan, it is seen as if the promoters are cash-strapped in their personal capacity, which could be considered as a bad sign for their companies.
|Company||Share price on Dec 31, 2019 (₹)||Share price on May 20, 2020 (₹)||Change (%)|
|Balrampur Chini Mills||183.35||85.05||-54%|
|Bajaj Consumer Care||236.45||132.25||-44%|
This can further affect the share price of the company and the market sentiment, leading to a fall in the share prices and erosion of shareholder wealth.
In turn, when the share price falls, lenders will either ask the promoters to pledge additional shares to meet the collateral requirements, or they could ‘invoke’ the promoter pledge and sell them in the share market to recover their loans.
In either case, there is a risk of share price of the company falling further, leading to further erosion of shareholder wealth.
So, while promoter pledges are transactions between the promoters and the lenders, a high percentage of promoter pledge can lead to a fall in share price of the company, which can affect shareholders as well.
Airtel shares set for a catch up rally after Reliance Jio takes a huge valuation lead
JB Chemicals, a little-known pharma company in India is now on the radar of private equity giants around the world – here’s why
Franklin Templeton reassures Indian investors that their money is safe — and the delay in repayments is due to cash crunch
- South Korea reports 49 new cases of COVID-19
- The battle between liquor deals and the government of Madhya Pradesh continues to intensify
- Highest single-day spike of 396 COVID-19 cases in Bengal; 10 more die of disease
- Assam: 3 arrested in looting, poaching cases
- District judge of Rohini court tests positive for COVID-19