Promoter pledging a big drag on shares

Shares of companies in which promoters have pledged a significant portion of their holdings have corrected more than the broader market since the Reserve Bank of India raised rates for the tenth time since March 2010 on Thursday.

Fears that promoters would be unable to meet the corresponding increase in interest costs resulting in sales by non-banking finance companies (NBFC), which lend to promoters against their shares, has resulted in pressure on these companies, according to experts.

DNA analysed 210 companies in which promoters have pledged more than 50% of their holdings.

Forty-nine of these companies have fallen in excess of 10% since the beginning of last week. Fifteen companies have dropped in excess of 15% and four have fallen more than 20%.

“There are concerns among investors that if the prices continue to drift downwards due to weak markets, pledged shares may be sold off by financiers which has led to huge cut in scrips of some companies like Mic Electronics, S Kumars, Orchid Chemicals, etc,” said Ambareesh Baliga, chief operating officer at Way2Wealth Securities.

S Kumars Nationwide, in which the promoters have pledged 83.07%, has fallen 22.29%. Mic Electronics in which promoters have pledged 64.32% of their holdings is down 26.55%.

Orchid Chemicals and Pharmaceuticals whose promoters have pledged 79.9% of their holdings has dropped 18.26%.

These companies underperformed the Sensex and midcap indices. They have fallen by an average 5.46% over the last one week compared to a 3.86% drop in the Sensex and a 4.82% fall in the midcap index.

“A lot of the promoter funding is done by NBFCs which have an appetite for high risk funding at high interest rates. Their own cost of funding has gone up after the rate hikes and promoters’ ability to pay back borrowed money is under question, resulting in a sell-off in many cases.” said Jitendra Panda, head of sales-broking at Future Capital Holdings.

A lot of NBFCs had been caught on the wrong foot in December 2010, when there was a sharp correction in midcap stocks.

This time NBFCs are more alert to the possibility of sudden and deep  downward price movements, said Subodh Shinkar, managing director and chief operating officer, JM Financial Services. “Though in most cases the margin collected is quite large, there is some selling of pledged shares by NBFCs when promoters are unable to meet margin calls triggered by falling prices,” he said.

Companies in the infrastructure and realty sectors are among the worst affected with promoters  said to be cutting costs by decreasing spends on advertising and marketing as well as freezing recruitments.

Investors are being advised not to rush in.

“Though the kind of 15-20% fall seen in a day across all such companies is not fundamentally justifiable, one needs to be cautious investing in companies with high  proportion of pledged shares,” said Baliga.