Further selloff could hit highly-pledged companies hard

MUMBAI: The risk of a sharper fall in shares of many midand small-cap companies in which promoters have pledged most of their holdings has increased in the wake of the stock market selloff in the last couple of weeks. Further declines in shares could result in lenders asking for more margins from promoters.
Brokers said promoters of various smaller companies will be more vulnerable to margin calls by lenders following the demonetisation scheme as many of them used cash to meet the margin requirements.

As on September 30, promoters of about 45 listed companies including Bajaj Hindusthan, Arshiya, Gokaldas Exports, IVRCL, JMT Auto, Reliance Defence, Surana Industries and Gujarat NRE Coke among others had pledged their entire holdings. Shares of some of these companies have fallen up to 30% since October 1.

“If the market slide continued, there is high possibility of pledged shares are liquidated or invoked, resulting in promoters who have pledged a high percentage of shares run a risk of losing considerable money and ownership,“ said Vinod Sharma, busi ness head, private clients group, HDFC Securities.

Since November 8 -when the government announced demonetisation of high value currency notes -BSE's midand smallcap indices have declined about 10% each.

Promoters of about 70 compan i e s i n c l u d i n g B a l l a r p u r Industries, Essar Shipping, Vi d e o c o n I n d u s t r i e s, K S K Energy, Suzlon, Lanco, Gayatri Projects and Hotel Leela among others have pledged between 90% and 99% as on September 30, 2016. “Retail investors need to look at pledging of shares very closely as they are the one to face the brunt if the stock prices plunge,“ said VK Vijayakumar, investment strategist, Geojit BNP Paribas Financial Services. “Higher the pledge, higher the risk and hence investors should be very careful with the stocks in which promoters have pledged more than 70%“.

Promoters have pledged shares worth `1.6 trillion, which is about 1.5% of the total BSE-500 Index's market capitalisation in September 2016. Promoters of 135 companies pledged their holdings in BSE-500 stocks. The high propor tion of shares pledged by promoters is an indication of the funding crunch that companies are facing during the downturn.

Most of the loans availed through share pledges have tenures of one to three years and carry a margin requirement of two-three times. This means that to secure an `100 crore loan, a promoter needs to pledge shares worth `200-300 crore.

Among others, promoters of UniTech, Gati, Parsvnath, Relig are Enter prises have pledged over 80% of their shares.