How Easy is Plegding Once You Do It Once
Understanding What is Pledging of Shares or Shares Pledged: While investigating stocks to invest in, the pledging of shares is one of the many important factors to check, which is often overlooked by many investors. A high pledging of shares can be a point of concern for the shareholders. In this post, we are going to discuss what exactly is pledging of shares and why high pledged shares can be troublesome for investors.
This is going to be an interesting post and I'm confident that you'll learn many new things concerning pledging of shares in this post. Therefore, make sure to read this article till the end. Now, without wasting any further time, let's get started.
1. What is Pledging of shares?
In simple words, pledging of shares means taking loans against the shares that one holds.
Shares are considered assets. Pledging of shares is a way for the promoters of a company to get loans to meet their business or personal requirements by keeping their shares as collateral to lenders. Pledging of shares can be used to meet different needs like working capital requirements, funding other ventures, carrying out new acquisitions, personal obligations, and more.
2. Why Promoters Pledge their Shares?
As discussed above, the promoters pledge their shares in order to meet various business or personal requirements.
Generally, pledging of shares is the last option for the promoters to raise funds. It is comparatively safer for the promoters to raise funds through equity funding or by taking debts. However, if the promoters are looking forward to pledging their shares, then it means that all the other options of raising funds have been closed.
These situations occur during the economic slowdown. As shares are assets that are held by promoters, hence it can be used as a security to take loans from the banks.
Also read:
- Shareholding Pattern- Things that you need to know
- How to Find the Shareholding Pattern of a Company?
- How Dilution Affects the Company's Valuation?
3. Why is Pledging of Shares risky for the shareholders?
While pledging of shares, the promoters use their stake as collateral to get the secured loans. During a bull market, pledging of shares may not create many issues as the market is moving upwards and the investors are optimistic. However, the problem arises in the bear market or economic slowdown.
As the price of stocks keeps fluctuating, the value of the collateral (against the secured loan) also changes with the change in the share price. However, in most cases, the promoters are required to maintain the value of that collateral.
Now, if the price of the shares falls, the value of the collateral will also erode. In order to meet up the difference in the collateral value, the promoters have to cover the shortfall by either giving additional cash or pledging more shares to the lender.
| Collateral Value (while taking the loan) | The collateral value after a 30% fall in share price | The collateral value after a 50% fall in share price | |
|---|---|---|---|
| Real-time value | 100 Crores | 70 Crores | 50 Crores |
| Remark | No Issue | More pledging of shares to cover up the difference of the remaining 30 crores | Higher pledging of shares to cover up the difference of the remaining 50 crores |
In the worst case, if the promoters fail to make up for the difference, the lender can sell the pledged shares in the open market to recover their money. This minimum collateral value is agreed upon in the contract between the lenders and the promoters. Hence, it gives the right to the lender to sell the pledged shares, if the value falls below the minimum value.
4. What is the Risk for Retail Investors in Pledged Shares?
In general, the stock price can fall heavily on the news that lenders are selling shares in the open market that are pledged by the company's promoters. This may result in a further decline in the collateral value because of the panic selling by the public.
In addition, the selling of the pledged shares by the lenders may also result in the change of the shareholding pattern of the company. This may affect the voting power of the promoters as they are holding fewer shares now and their ability to make crucial decisions.
Moreover, pledging of shares can create a disaster if the share price continues to fall. This is because the promoters have to consistently pledge more shares to cover up the difference in the collateral value.
5. How to find the pledging of shares for Indian companies?
You can find the pledging of shares for any public Indian companies using any of the two methods mentioned below.
METHOD 1:
You can find the pledged share as the percentage of total holding sharing shares on the BSE or NSE website. Publically listed companies are obliged to submit their quarterly shareholding pattern to the stock exchanges. Hence, you can find the latest information regarding their shareholding pattern on the BSE/NSE website.
Here are the exact steps to find the pledging of shares for the Indian public companies.
- Go to BSE India website.
- Search the company name in the top search bar.
- Click on the 'shareholding pattern' tab on the left sidebar of the company page.
- Open the latest quarter report of the shareholding pattern.
- You can find the summary statement holding of specified securities.
For example, here is the shareholding pattern of Suzlon Energy for the quarter of March 2021. Please notice the current pledging of shares (88.54%) by the promoters.
METHOD 2:
You can find the latest shareholding pattern and pledged shares of any public company in India on Trade Brains Portal. It is a comparatively easier and faster method to find the pledged shares.
Here are the steps to find the pledging of shares using Trade Brains Portal:
- Go to Trade Brains Portal
- Search the company name on the top search bar and Open the company page.
- Go to the shareholding pattern section and find out the pledged shares.
For example, here is the shareholding pattern of Suzlon energy on the Trade Brains Portal. Here, you can notice that the pledged shares for the promoters is equal to 88.54% for the Mar 21 quarter.
Also read: How to find complete list of stocks listed in the Indian stock market?
6. Bottom line
Pledging of shares is generally seen in the companies where the shareholding of the promoters is high. As a thumb rule, pledging of shares above 50% can risky for the promoters.
Always ignore companies with high pledging of shares to avoid unnecessary troubles. This is because pledging of shares is a sign of poor cash flow, low-creditability high-debt company, and inability to meet the short-term requirements. (If the promoters have pledged a high percentage of shares, then it's always worthwhile to find out the reason.)
Anyways, a decreasing pledging of shares over time is a good sign for the investors. On the other hand, an increasing pledging of shares can be dangerous for both promoters and shareholders. Even quality companies can become a victim if the pledging of shares is not reduced over time.
Nevertheless, pledging of shares is not always bad for companies. Many times, companies are able to come up with new winning products, services, etc that turn around the company using the loan from pledged shares. If the company has an increasing operating cash flow and good future prospects, then pledging of shares is not a big concern for them. Here, pledging of shares helps in the expansion of the company or to carry out new projects which results in increased revenue in the future. Moreover, 5-10% pledging of shares in fundamentally healthy companies should not be considered as a problem. Small pledged shares can be efficiently managed. However, the problem occurs when the pledging increases too much.
Anyways, the bottom line is to try avoiding investing in companies with a high (or increasing) pledging of shares.
That's all for this post. I hope it was helpful to you. Happy Investing!
Kritesh (Tweet here) is the Founder & CEO of Trade Brains & FinGrad. He is an NSE Certified Equity Fundamental Analyst with +7 Years of Experience in Share Market Investing. Kritesh frequently writes about Share Market Investing and IPOs and publishes his personal insights on the market.
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Source: https://tradebrains.in/pledging-of-shares-listed-companies/
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