*AAKASHAYA
PATRA SEVEN STAR SMART EDUCATION SERIES PART – 40 :* 12.04.2020
Extent of Pledging of Shares
by Promoter
Watch it Carefully!
Pledging of share means,lending shares as collateral for
taking loan.Promoters of a company often pledge their shares to raise funds for
the needs like raising money for converting warrants issued to them into
shares, fresh purchase of shares of their own company
from secondary market, personal needs or obligations,
need of working capital for the company,business expansion, funding new
acquisitions, etc.
Pledging of shares is common in those companies where
the promoter holding is higher. According to a rough estimate promoters of more
than 75% of listed companies in India have pledged their shares, under certain
situations.Generally, pledging of shares is the last option for the promoters,
used only after exploring all the alternate sources for raising funds. This is
because the cost of such funding is always higher as compared to other means of
raising funds.Companies with higher percentage of promoter pledging often tend
to suffer when market falls.This is because when their stock prices falls, the
value of their collateral also goes down. Under
such circumstances, promoters may have to pledge more
shares or pay cash to make for the shortfall in the collateral value. If a
promoter fails to meet this shortfall in the collateral value, then lenders have
the right to sell the shares pledged with them and such selling leads to
further drop in companies share price and the vicious circle starts.
In extreme circumstances, this not only causes severe
wealth destruction for shareholders of the company but also reduces the
promoter shareholding in the company thereby reducing his voting power and
their ability of making crucial decisions.You can come to know about the amount
of shares pledged by promoters in terms of percentage of their total
shareholding in the company from the websites of BSE or NSE. All listed
companies in India have to submit this data to the exchanges every quarter.
As a thumb rule, to be on safer side, it is better to
avoid investing in companies where the promoters have pledged more than 50 to
60% of their shareholding.Just looking at pledging of shares data for one
quarter is not enough, we must also look at the larger trend. An increased
percentage of pledging of shares by promoters over a period of time is seen as
a bad sign while a decreasing percentage of pledging of shares by promoters
over a period of time is seen as a good sign.
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