Promoters of businesses frequently pledge their own shares with lenders in order to raise funds in their personal capacity. This practice is very common in corporate India.
Pledging simply means taking loans against the shares that one holds. Shares are a type of asset. They act as a collateral against loans. Any individual or institution that holds shares can pledge them.
Shares can be pledged by a company’s promoter to obtain cash for various purposes. The amount raised can be used for a variety of objectives. This includes supporting other businesses, working capital requirements, debt repayment, and so on.
When a large percentage of the shares owned by promoters is pledged, it can have a negative impact on the value of the shares held by shareholders. The stock is typically viewed as a high-risk investment.
Recently, we covered a similar article on the topic of promoter pledging. We discussed popular companies where promoters have pledged a huge amount of their shares.
You can read the entire piece here: Stocks With Highest Promoter Pledging
In continuation to this, here are some more stocks which have promoter pledging higher than 50%.
1. Ruchi Soya Industries (100%)
Patanjali Ayurved owned Ruchi Soya has promoter holding of 98.9% in the company. Out of this, promoters have pledged 99.97% of their holdings as of June 2021.
Since March 2020, promoter pledging has remained above 99%.
The edible oil firm is all set to launch its follow-on public offer (FPO) in the coming months to bring down promoters’ shareholding in the company.
Recently, the company finally received approval from India’s stock market regulator to launch a US$585 m FPO.
The promoters’ need to pare their stakes to meet minimum 25% public shareholding norm. It has until December 2022 to meet that target.
Patanjali had acquired Ruchi Soya for US$620 m, through a bankruptcy court order, in December 2019 after billionaire Gautam Adani withdrew from the bidding process.
2. Vedanta (100%)
Promoter entities of Vedanta have pledged their entire stake in the mining firm to raise funds for the open offer for shares in the Indian unit and to service debt.
In all, 2.4 bn equity shares of Vedanta held by the promoter entities are encumbered. That’s 99.9% of the total promoter stake in Vedanta — which stands at 65.18%.
The encumbrance is linked to US$1.2 bn worth of bonds that were issued by Vedanta Resources Finance II Plc. The 8.95% guaranteed senior bonds are due in 2025. Citicorp International is the trustee for the holders of the bonds.
The funds raised will be used for acquisition or any remaining proceeds will be used to service debt of certain entities of the promoter group.
Last week, Vedanta Resources (VRL) owned by the family of Anil Agarwal through Volcan Investments, a holding vehicle with a 61.7% stake in the business announced that it has reduced its net debt by US$300 m in the first half of this fiscal and expects to further reduce its debt by US$ 500 m in the second half of the financial year 2022.
With the entire debt repayment at Volcan, the pledge on all the equity shares of VRL has been released, the company said in a statement.
It’s interesting to note that the company’s shares have moved higher by 122% in the last one year. Currently, the company has a market cap of ₹1,118.99 bn.
3. Forbes & Company (98.2%)
Promoters of Forbes & Company hold 73.8% stake in the company, out of which 98.2% is pledged.
Recently, Shapoorji Pallonji Group (SPG) has sold majority stake in its consumer durables business under the Eureka Forbes label to US-based private equity fund Advent International for a sum of ₹44 bn.
Eureka Forbes is a subsidiary of listed parent company Forbes & Company.
Forbes is a small-cap company with total marketcap of ₹54 bn. Currently it’s trading at ₹4,184 per share on the BSE. In the last one year, the stock is up 188%.
It’s mainly engaged in the business of manufacturing and trading of engineering products, real estate development projects, and leasing of premises.
To know more, check out Forbes & Co’s latest shareholding pattern.
4. CG Power & Industrial (95.8%)
CG Power & Industrial’s total pledge stands at 95.8% of promoter holdings. The company’s promoters hold around 53.25% stake of the total equity.
The promoters have marginally increased their holding from 53.24% to 53.25% in June 2021 quarter.
On the other hand, foreign institutional investor (FII) have increased their stake significantly. They hold around 10.7% compared to 4.66% reported last year.
Meanwhile, in last three quarters, mutual fund holdings of the company have stayed almost constant at 4-5%. At a time in September 2019, mutual funds held a 23% stake in the company.
CG Power and Industrial Solutions, a Murugappa Group, firm approved a proposal for voluntary winding up and closure of its non-operating firms.
CG Middle East FZE is a non-operating step-down subsidiary, while CG International (Holdings) Singapore is a wholly-owned subsidiary of the company.
The board also approved a proposal for closure of one of its non-operating subsidiaries, CG Power Solutions under the provisions of the Insolvency and Bankruptcy Code.
CG Power, which was taken over by Tube Investments of India in 2020, had posted a consolidated net profit of ₹480 m June quarter 2021-22 mainly on the back of higher revenues.
Over the last one year, shares of CG Power and Industrial Solutions have surged nearly 280%. In September 2020, its share price was ₹24. Currently it’s trading at ₹92 on the BSE.
5. Panacea Biotec (94.27%)
Promoters of Panacea Biotec hold 45 million shares in the company and have pledged 42.4 million out of those.
This makes up 94.27% of all the shares held by the promoter and 69.37% of the total outstanding shares of the company.
The company’s total promoter holdings including pledged and unpledged shares stands at 73.59%. In last 6 months, promoter holding in the company has stayed almost constant.
Panacea Biotec is a health management company. The company’s principal business activity is the manufacture of allopathic pharmaceuticals preparations.
Recently, Panacea Biotech and the Russian Direct Investment Fund (RDIF) has announced the first shipment out of 1 million doses of the second component (human adenovirus serotype 5) of the Russian Sputnik V coronavirus vaccine for sale in India.
Panacea has joined hands with RDIF for manufacturing Sputnik V in India. This move will help the company generate adequate revenues.
6. Jindal Stainless (86.6%)
A significant proportion of promoter holdings is pledged in this stock. According to data available on the BSE, promoters of Jindal Stainless hold 68.12% stake in the company. Out of which 86.6% is pledged.
Three weeks back, Jindal Stainless clarified various queries from certain investors. The company pointed out a buzz that was circulated on social media clubbing the name of Jindal Stainless along with the companies which have the highest promoter pledging.
In its regulatory filing, Jindal Stainless said,
In this regard, the company has in the past clarified its position and reiterate that such information is misleading and do not represent the true picture.
The company to give assurance to its shareholders, would again clarify that there is NO recent loan raised against the shares (LAS) and therefore there is no linkage between the pledged shares and their market value.
Further, Jindal Stainless said that in fact, the rating agencies viz. CRISIL and Fitch’s India Ratings have recently upgraded the company’s credit ratings for long term credit facilities of ‘A+’ with the key reasons being accelerated deleveraging, pre-payments of debts, along with strong operating performance leading to a healthy balance sheet.
Apart from the above, here are other companies where promoters have pledged their shares.
Promoter Pledging: Boon or Bane?
Is promoter pledging a bad thing? Absolutely not.
After all, promoters need funds and they may use their shareholding in the company to do so. If these funds are redeployed into the main business, it should bode well for the company.
If the loans are being taken for personal needs, then it should be treated as a warning signal.
Though the question does remain why were other sources of funding not availed by the company?
Share pledging is not an illegal activity as banks often seek additional security in the form of promoter shares.
However, you must keep an eye out for such companies especially for those with questionable managements.
Here’s what lead smallcap analyst and editor of Hidden Treasure, Richa Agarwal, thinks about promoter pledging:
The promoter using pledged shares as a way of raising capital is okay. However, from a small retail shareholder’s standpoint, a high amount of pledging with bad financials could lead to the banks or financial institutions (who hold these shares as a collateral) to dump them to recover their dues.
This would then have a cascading effect on the stock price as well, resulting in a huge loss for the shareholder.
It’s always better to check promoter pledging before making investment decisions.
Over leveraged firms with high percentage of pledged shares could very well turn out to be value traps.
This article is syndicated from Equitymaster.com
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