Promoter groups pledge over 90% of their shares in 27 companies

27 Feb 2009, 0725 hrs IST

Promoter groups have pledged more than 90% of their holdings in 27 companies, shows an ETIG study based on disclosures made by 467 listed firms Well-known listed companies in this category include Kirloskar Electric, JP Hydropower, ERA Infra Engineering and Micro Inks.

Promoters of another 38 companies, including realty firms Unitech and Parsvnath besides other large firms such as Tata Teleservices (Maharashtra) and India Cements Capital, have pledged over 70% of their holding in the company. When the promoter group pledges a high proportion of its shares , the firm is potentially vulnerable to a management change. However, so far there are just three cases, including Satyam, with promoters actually losing control due to share pledging.

In the case of Satyam, former chairman B Ramalinga Raju had got the IT firm’s board to approve purchasing of a company owned by his family at a phenomenal valuation. This was done at a time when almost his entire stakeholding was pledged. Following the Satyam case, market regulator Sebi has made it mandatory for listed companies to disclose details of pledged shares.

“Usually a lender gives a loan worth 60% of the value of shares and if the share price falls, a margin call is triggered. There is a risk of management change if the quantum of shares pledged is high,” says Prithvi Haldea of Prime Database, an independent market research firm. He points out that some promoters may even be tempted to manipulate profits of the company to keep the share prices inflated and avoid triggering selling of shares.

Promoters of a quarter of all the companies in the study have pledged more than half of their total stake. Most haven’t disclosed either the object or the institutions with which shares have been pledged. Shares owned by promoters are pledged either for their personal borrowings or as a collateral with banks and other financial institutions against borrowings by the company.

If the value of shares drops significantly, as is the case currently, banks ask for more shares or some other collateral. If the firm or the promoter fails to furnish the extra amount, the lenders can sell the shares in the market. Some firms, however, say there is not a significant risk of selling such shares in the market.

Consider JP Hydropower, where promoters have pledged around 59% of their total 63% in the company. “These pledged shares are only secondary securities. The primary security is the project for which finance is made available,” says a senior executive of JP Hydropower.

Moreover, these shares are not really linked to market prices and do not trigger margin call, as they are meant to ensure lenders have control over the company in case of a default. JP Hydro shares were pledged before it was listed. “There is definitely a case for more disclosure, which will bring in more transparency in the way promoters and companies function,” says Gagan Banga, CEO of Indiabulls Financial Services, an NBFC with which many promoters have pledged shares.

Mr Haldea says these are early days. “We will learn lessons as we go along. It’s debatable if companies need to disclose the object, name of lenders and even use of funds. But the focus should only be on disclosures that are relevant and useful for investors.”

There are also firms where one of the co-promoters has pledged a large part of his stake. So, even though the proportion of pledged shares of the total promoter holding is not significant, if margin calls are triggered it could see one of the co-promoters losing part control of the company.

One such example is UTV Software in which original Indian promoter group has pledged 22.7% out of 23.3% held in the company. But the majority stake in the firm is now owned by Walt Disney (59.9%) and as a result, percentage of the promoter group holding pledged would not be significant.

Among the companies, where large part of promoter’s stake is pledged, there is another set of firms where the total shares pledged is a significant proportion of the total paid up capital. Those companies include India Cements Capital, Satra Properties (India) and Micro Inks.

via: E.T