Share pledging rises across sectors: All's well with corporate India?

Busting the notion that share pledging by promoters is on the rise in sectors such as energy and infrastructure where incidence of stressed assets is climbing, owners of companies across sectors, some relatively financially healthy ones, are using pledging to meet their urgent fund requirements.

According to a report by Kotak Institutional Equities, promoters of a total of 116 companies, or one-fifth of BSE-500 entities, pledged their holdings by December last year. Though the numbers increased over the quarter ended in September only marginally from 114 then, the growth trajectory has been consistent in indicating that not all is well in the corporate circles and earnings are yet to reach stable levels.

The list of 116 includes companies across sectors including Indiabulls Real Estate, Coffee Day Enterprises, Jain Irrigation Systems, Infibeam Avenues and Jindal Steel & Power. These entities saw highest surge in the pledged promoter holdings in the December 2018 quarter. Others like Texmaco Rail, Uflex and Wockhardt pledged their shares for the first time.

While promoters increased the quantum of pledged shares from 40 to 61 per cent between September and December period last year, a growth of over 21 per cent, Coffee Day saw pledging increasing from 59.7 per cent to 79.4 during the same period. Jindal Steel & Power also pledged 50.2 per cent of promoters holding with banks and financial institutions.

"The pledging has picked up post-2014, after Non-Banking Financial Companies (NBFCs) became a lot more aggressive in lending to promoters. This arrangement worked well till 2017 when the mid-cap and the small-cap shares were having a positive run. Tables turned only after the mid-cap and small-cap stocks started correcting due to the weak sentiments hitting this section of the market. This has made companies with high levels of pledged share riskier for investors," said Mayuresh Joshi of Angel Broking.

A case in point here are companies such as CG Power and Industrial, Kwality, IL&FS Transportation Networks, Hindustan Construction Co, Jindal Stainless Hissar and Sterlite Technologies where promoters have pledged more than 90 per cent of their holdings to raise funding support.

According to Kotak Equities, the percentage of pledged promoter holdings stood at 6.7 per cent in the December quarter similar to that of September 2018. But outstanding promoters` pledged shares were at a high of Rs 1.96 lakh crore, which is about 1.47 per cent of the total BSE-500 Index`s market capitalization in December 2018.

But the Kotak report has also clarified that pledging of shares does not necessarily imply that a company or a promoter is under financial stress; banks (lenders) could have sought additional security in the form of promoter shares.

While increasing number of promoters are raising pledging, a chunk of companies have also bucked the trend and actually paid banks to free up shares. Kotak report said that promoter holdings declined in companies such as Fortis Healthcare, Suzlon Energy, Advanced Enzyme Technologies, Adani Transmission and Indiabulls Housing Finance in the December quarter.