Stakeholder pledging is falling, hinting deleveraging during pandemic | Business Standard News

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Trend suggests those who had pledged their shares chose to redeem it as markets soared rather than borrow more heavily.

Stock market, marketsThis shows a continuous decline in the years since then

Stakeholders may have reduced the amount of debt they take on by pledging shares on a relative basis recent trends show.

While the absolute value of pledged shares has gone up for the sample of companies analysed by ‘Business Standard’, it is a lower proportion of their total market capitalisation. This would suggest that those who had pledged their shares chose to redeem it even as markets soared rather than borrow more heavily as their collateral became more valuable.

The analysis considered a sample of 953 listed companies. Stakeholders had pledged shares worth the equivalent of five per cent of the companies’ total market capitalisation as of September 2017. This shows a continuous decline in the years since then. It was down to 4.1 per cent as of September 2021 (see chart 1).

Pledging is a process by which promoters and other stakeholders can borrow money keeping their shares as collateral with lenders. Regulations require the proportion of pledged shares to be made public: a rule prompted by the 2008 global financial crisis. Companies with high pledging can often see significant declines when promoters were unable to meet their obligations to lenders. Lenders would dump the collateral stock in large quantities causing share prices to plunge.

The Securities and Exchange Board of India (Sebi) tightened disclosure norms again in 2019 after some promoters were believed to be making use of innovative structures to pledge shares.

“Recently, some instances have come to light where private limited companies (controlled by the promoter(s) of a listed company) issue…(debentures)…backed by the promoter(s) either in the form of pledge of securities (including shares) of a group company or through other forms of encumbrances such as covenants….which are very complex in nature. The intention of the Takeover Regulations is to cover all types of encumbrances by whatever name called. Accordingly, it is felt that there is a need to further clarify the scope of encumbrance and make it more specific for the purpose of disclosure requirements,” said Sebi’s 2019 note on the change in regulations.

While the overall trend towards a lesser stake used as collateral against borrowing, individual sectors have seen an increase in pledging. The 953 companies under consideration came from 69 different sectors. The top five accounted for 54.7 per cent of the total value of pledged shares in the sample. Mining and mineral products saw an increase since September 2019. It accounted for less than 0.1 per cent pledged shares at the time. It currently accounts for 21.4 per cent. Infrastructure developers and operators have reduced their overall share in the value of shares pledged though it still figures in the top five sectors by value of shares pledged. This is also true of power generation and distribution companies (see chart 2).

The sample covers pledged shares worth Rs 3.3 trillion as of September 2021. This is likely to be broadly representative going by BSE’s figures for overall pledging across listed companies as of Friday, December 17 2021. It identified 729 companies where promoters had pledged shares. The total value was Rs 3.66 trillion.

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