Thursday, July 26, 2012

Promoter's shares pledging at the highest since 2009

Pledging of shares by promoters of listed companies has reached its highest level since 2009, when it was made mandatory to disclose the encumbrance of shares by market regulator Sebi, a report has said.
According to an analysis of BSE-500 companies by ICICI Securities for the quarter ended March 2012, aggregate number of shares pledged as a percentage of those held by promoters rose to 10.4% from 9.4% a year ago.
his is the highest since 2009, when it became mandatory for firms to disclose the data. In December quarter, percentage of promoter holding pledged stood at 10.1%.
Experts believes promoters are forced to pledge shares with lenders in return for loans due to liquidity crunch.
“In the last 11 quarters, from the data available on pledged shares, we have been able to decipher that promoters have utilised pledging of shares to get loans on a regular basis. On an average, 8-10% of the promoter’s holding has been pledged during September 2009-March 2012,”
Companies such as Yash Papers, Zee News, Sri Adhikari Brothers and GTL have increased pledged shares between December quarter 2011 and March quarter 2012.
In contrast, firms including Tata Coffee, Adani Power, Mangalore Chemicals & Fertilizers and Shree Renuka Sugar, saw a drop in percentage of stake pledged in the March quarter.
Interestingly, there were four companies, including Gujarat Pipavav Port and Thomas Cook (India), where owners have pledged their entire stake.
Promoters of another 13 companies such as billionaire Vijay Mallya’s United Spirits and real-estate developer Housing Development & Infrastructure Ltd (HDIL) have pledged more than 90% of their shares.
In terms of sector, companies in the oil and gas space have seen more than double the promoter shares being pledged in the March 2012 quarter as compared December quarter.
Real-Estate and power sectors too have seen a rise in the promoter shares being pledged, while banks and textile companies have been able to reduce the percentage of their promoter holdings being pledged.
“However except for the March quarter, the previous four quarters saw the BSE 500 index correcting 25%, resulting in an erosion of market capitalisation of stocks and the value of shares pledged for securing loans,” Pandey said.
“In such a scenario, companies that have taken loans against shares have to provide further margin in cash or pledge more securities to maintain the margin requirement. The companies that default may face the situation of selling of pledged shares by lenders resulting in a decline in stock prices and reduction in promoter holding,” he added.
In 2009, Securities and Exchange Board of India (Sebi) had mandated companies to make disclosures of shares pledged by their promoters after every quarter.

Surprisingly, the list of companies where promoters have been steadily pledging their stake in recent times include some prominent A-category Bombay Stock Exchange (BSE) listed companies like PV Ramprasad Reddy and Nithyanada Reddy promoted Aurobindo Pharma, GM Rao's GMR Infrastructure as well as politician L Rajagopal's Lanco Infratech.
This list also includes several B-category BSE-listed players like logistics company Gati Ltd promoted by Mahendra Agarwal, Gayatri Projects promoted by politician T Subbirami Reddy's family, Mic Electronics promoted by V Rao Maganti and in which Venkateswara Rao Daggubati and D Purandeswari are investors as well as Krebs Biochemicals in which Ranbaxy and Dr Reddy's Laboratories chairman K Anji Reddy and DRL managing director Satish Reddy are also investors, among others.
In some instances, like Gati and politician Y S Chowdhry promoted Sujana group companies, banks and FIs had even started invoking their pledged shares to make good the losses during the October-December 2011 quarter. According to estimates, over 120 Hyderabad-based companies are listed on the bourses.
In fact, a recent Crisil Research report on promoter pledging too had voiced concern over promoters of nearly one third of the 1,214 listed companies in India with market capitalization of over Rs 100 crore pledging a portion of their shareholding. Not surprisingly, this study contained the names of several Hyderabad-based companies like ICSA India, Andhra Cements, Gayatri Projects, GSS Infotech, Gati Ltd, Sanghi Industries, Viceroy Hotels that had over 80% promoter equity pledged.
Putting down the high volatility in the capital markets in 2011 to high domestic inflation, rising interest rates and tepid global economic environment, the Crisil report, based on data up to November 2011, had pointed out that promoters who had pledged a chunk of their stake run the risk of losing control over their companies and expose investors to higher share price volatility if they fail to meet payment schedules or provide additional collaterals to banks and FIs.
In fact, analysts point out that the woes of Hyderabad-based companies stem from a combination of high debt, falling share prices and over-ambitious promoters and with the dark clouds of the economic crisis not looking like clearing up anytime soon, highly pledged promoters and companies may be in for big trouble this year.
"Companies saddled with huge debts at high interest rates are feeling the heat especially as banks and financial institutions are turning cautious on lending money due to the current economic situation," explains independent consultant VS Vasudevan.
However, industry insiders point out how many Hyderabadbased promoters had over-leveraged their balance sheets and showed huge market capitalization so that they could raise more money from private equity investors, banks and even pledge their shares at higher prices. In most cases these promoters had successfully safeguarded their personal wealth.

"While some promoters pledged their stake to grow the business which is alright, there were others who raised money during the boom to play the markets or invest in realty or use the funds for other investments, but their strategy to either raise huge debt or pledge shares at higher prices has backfired due to the downturn and volatile markets," points out an analyst who tracks Hyderabad-based companies.
The falling share prices during the current fiscal forced promoters, who had pledged their stake, to top up their margins and when they failed to do so banks and financial institutions started selling off their shares to make good their losses, resulting in a major variation in promoter holding in last 2-3 quarters in some companies, analysts explain.
Adds investment consultant Hem Kumar: "Companies where substantial promoter equity is pledged and financial performance has decreased dramatically in the last couple of quarters will be the first ones to get hit and may find it extremely difficult to survive the downturn unless they are able to make a substantial improvement in performance."
"Though pledging of promoter stake is a routine activity in sectors that require a constant flow of funds such as infrastructure or in events like acquisitions where pledging of shares acts as a form of bridge financing, investors have to be cautious where the promoter pledging is done in stocks and sectors where there is no ostensible end use of such funds," cautions P Phani Sekhar, fund manager-portfolio management services, Angel Broking.
And while the Satyam scam may have forced market regulator Sebi to make it mandatory for promoter to disclose their pledged stakeholding, Hem Kumar feels it's time Sebi made these disclosure norms more stringent and also made it mandatory for companies to declare the status of debt so that investors and shareholders can better protect themselves.