Investor Alert

According to a recent PRIME Database report, 522 of the 1,538 companies listed on the National Stock Exchange have at least some share pledging and pledging of shares by promoters is at a sevenyear high.

Many a times, shares are pledged only when they touch a high price, which would fetch a steep price to the promoters. The routine would continue for sustained period, post which the promoters would offload or pledge a significant part of their holdings. The practice is not good for investors where such practices are regularly seen. In fact, several debt-laden companies have been in such a state more due to promoters borrowing highly and then not being able to repay. “High pledge levels are typically not considered a good sign by investors, as a downturn in market price can lead to invocation and change in management,” says Pranav Haldea, managing director, PRIME Database.

In the event of stock prices of pledged shares falling, promoters have to provide more shares as collateral, failing which lenders might start liquidating them. The impact on the small investor is most, who find their investment value eroding due to such practices. Yet, some of the best known companies borrow money—TCS tops the list of companies that have pledged the maximum value of shares at Rs.10,708 crore, according to the report. At Rs.1.97 lakh, the value of pledged shares at the end of June quarter works to about 8.5 per cent of the total market capitalisation.

As an investor, it is in your interest to tread cautiously when you have investments in a company where the promoters have borrowed extensively by pledging their stakes. The moment promoters start to pledge a significant part of their stake, investors should reconsider their positions in such stocks.

olmdesk@outlookindia.com