Promoters of Indian companies are finding it increasingly hard to finance their debt and capital needs. Or so it appears from the fact that pledging of shares by promoters last quarter shot up to the highest level in the last 10 quarters.
An analysis of promoter shareholding patterns for 470 BSE-500 index companies reveals that the aggregate number of shares pledged as a percentage of those held by promoters increased to 10.59% at the end of June from 9.78% at the end of March.
Sudip Bandopadhyay, MD & CEO, Destimoney Securities, feels the sharp upsurge in pledges is hardly surprising, given the sharp fall in broader markets. “The broader markets have seen a big crash, with the share prices of many of the midcaps quoting nearly 30-40% lower than their March-end prices. As the price of share falls, the promoter who has created a pledge with a financier needs to top up the number of shares to keep the pledged value at same levels,” he said.
The last quarter saw midcaps and small caps falling nearly 3% each even as the benchmark Sensex gained 3%. The metal, consumer durables and realty indices fell 11.5-15% over the June quarter.
Companies with the highest promoter pledging as at end-June included Gujarat Pipavav Port (100% promoter stake pledged), Suzlon Energy (99.92%), Elder Pharma (99.42%), Pipavav Defence (97.52%), Hotel Leela (96.39%) and HDIL (96.12%).
As against the previous three quarters where the number of promoter pledged shares didn’t see much change, the June quarter saw 54 companies increasing the percentage of pledged shares even as there were 42 others which were able to revoke or reduce part of their pledged shares.
Mehraboon Jamshed Irani, principal and head - priority client group at Nirmal Bang Securities, also blames it on investor’s aversion to buy into such companies.
“Basically, companies are finding it difficult to service their debt and this has led to many of the corporates pledging more stake. Also, with markets averse to investing in companies with high debt, high promoter pledge or having corporate governance issues, the share prices of these companies have taken a beating, leading to further pledge creation,” he said.
Companies with the highest increase in percentage of shares pledged included Japypee Infratech (83.12% increase in pledge of promoter stake), Cairn India (65.81%), Core Education (31.65%), Alok Industries (30.82%) and Elder pharma (19.28%).
Going ahead, experts see little chance of the pain reducing for Corporate India. This means promoter pledging is likely to continue to be high for a while.
In a recent note, international rating agency S&P said the corporate sector’s weak performance, along with high interest rates, posed a threat to the debt-servicing capability of these companies.
“The government has yet to completely address several structural issues, particularly those related to the mining and power sectors. We believe that the infrastructure (power and road), metals and mining, construction, and capital goods sectors are particularly at risk,” Geeta Chugh and Mehul P Sukkawala, analysts at Standard & Poor’s Rating Services, wrote last week.
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