Ind Inc promoters forced to draw loans by pledging their holdings
Mumbai: The stress in corporate India seems to be more deep seated than what is coming out from earnings numbers. A large number of India Inc promoters has been forced to draw loans by pledging their holdings in the company and keep their entities afloat.
The top of the list is the Adani Group where the value of pledged shares is at a mind boggling high level of Rs 35,226 crore with some of the group entities having pledged close to 50 per cent of promoter holding with financial institutions against security for loans.
This is followed by the Tata Group, considered a relatively stable enterprise with assured revenue stream. The total value of pledged shares in this case is a high of Rs 19,097 crore. But unlike the Adani’s, where almost all group entities in energy and infrastructure sectors have borrowed by heavily pledging promoter shares, the stress as reflected by this trend seems to be concentrated in the operations of failing Tata Teleservices (Maharashtra) Ltd where promoters have pledged close to 35 per cent of their holdings.
There is no surprise in the case of Zee Group where shares of its entertainment arm tanked over 30 per cent last month in the wake of a media report that said its promoter company Essel Group was allegedly involved in laundering. The promoter pledged share is close to 60 per cent in case of ZEE Entertainment Enterprises, while cable television venture Siti Cable has astronomically high level of pledged shares at over 82 per cent.
Share pledging is generally on the higher side in sectors like — engineering, infrastructure, textiles. Promoters contribution in new greenfield projects is met by pledging of shares which are seen more in Power and Steel companies, where there is a long gestation period. These are the sectors where already stress level is high and many of the entities are also facing bankruptcy proceedings.
Accordingly, in companies like JSW Steel and JSW Energy, share pledging by promoters is at a high of about 43 and 53 per cent respectively. Even Kishore Biyani controlled Future Group of companies have high levels of pledged share of between 50-70 per cent while Naveen Jindal Group that has also lately faced problems with his energy business having lost the linked coal block has pledged almost half of his holding in Jindal Steel and Power. Similarly, Anil Agarwal has pledged almost entire promoter holding to keep Sterlite Technologies running while promoters of GMR Group also seems to have been left with no option but to pledge over 82 per cent of promoter holding.
“The pledging has picked up post-2014 after Non-Banking Financial Companies (NBFCs) got 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 level of pledged share riskier for investors,” said Mayuresh Joshi of Angel Broking.
Drawing loans against the shareholding or ‘share pledging’ also turned its head recently after the spike in the same caused multiple panic sell-off in the select stock. Experts see this as direct link between stressed sectors and the extent of pledged shares.
Data from the bourses show that pledged shares have seen a jump since 2014. Analysts say that share pledging is one way of promoters funding new greenfield projects but owing to speculation around the same and a lack in transparency, rise in pledged shares and its sale has caused massive volatility in specific stocks.
Companies report their share pledging on a quarterly basis but common investor does not know the minor details of pledging which creates confusion.
“There needs to be more transparency in the details of promoters pledging so that investors can take informed decisions while taking exposure to such companies,” said Kotak Securities Head of Fundamental Research, Rusmik Oza.
“The NBFC squeeze had triggered a fresh wave of uncertainty in the market after which margin call triggers in select high pledged shares has led to panic selling in many companies with poor corporate governance,” Oza added.
The problem becomes a lot more acute, said Joshi, in the case of mid-cap and small companies or where the share of the promoter pledge is more than 80 per cent of the promoter holding. That is where in the case of either market or business or the macro volatility, the underlying value proposition of the company reflected through its market price becomes most vulnerable.
Although such pledges have happened across sectors, it is more prevalent in capital expenditure heavy (CAPEX) sectors like steel, power, ports and telecom where the promoter has borrowed to fund their stake buys in the same company or another group company which is a capex heavy ventures, said Deepak Jasani of HDFC Securities.
Accordingly, the data from BSE till February 8, 2019 shows that energy and infrastructure major Adani Group’s value of pledged shares was as much as Rs 35,226 crore. That of Tata Group was to the tune of Rs 19,097 crore. Essel Group was at Rs 12,601 crore and the conglomerate Jindal group stood at 16,570 crore. Others with high value of pledged shares were Biyani Group at Rs 8,513 crore and Vedanta at Rs 4,692.
Discussing the volatility caused due to pledged shares, Jasani said that the sale of promoter pledged shares results in a sharp fall in stock prices as the lender is in a “hurry to recover the shortfall by selling shares at the earliest and cutting his losses”.
Analysts pointed that investors tend to be more jittery when sales of such shares happen and even if the share sale does not go through, the high percent of pledged share flashes a possibility of such a share sale happening.
In a bull market, as stock prices and the market cap goes up, the ability of promoters to raise higher amount also rises. In this phase we see many ambitious promoters try and leverage by increasing their share pledge and raise money for either personal interest or any other business initiative.
Experts said that the problem starts when prices go in a technical bear phase (i.e. 20 per cent fall from the peak price). That’s when the pressure of margin call starts and unless the promoters are able to pay for the mark to market difference, the lender is forced to sell the share to maintain his margin.
Suggesting possible solution, experts said that promoters can be asked to disclose such share sales immediately on their happening with its cause and the likely scenario of share sales going ahead which will give investors a heads up about the reason for fall in share price.
(Ravi Dutta Mishra can be reached at email@example.com and Subhash Narayan at firstname.lastname@example.org)