“Given that the markets have stayed pretty much at the levels that they were at the beginning of the year, more than an increase in pledging by promoters, I attribute this primarily to mutual funds reducing their exposure and banks
filling that gap,” said Pranav Haldea, managing director of capital market tracker PRIME Database, which runs nseinfobase.com.
Abhimanyu Sofat, head of research, IIFL Securities, said that promoters have been trying to deleverage in the last three or four months, even as the cost of borrowing has remained high through the pledged shares route — going even to the high teens.
“Lenders are also asking for more collateral, which could reflect in higher amount of shares pledged by value for the same amount of borrowing,” he said.
The Nifty500 index, an indicator of how the broad markets have fared, is down 4.4 per cent since the beginning of the year. Many individual stocks have fallen more. This would indicate that the exposure is not only because of a possible rise in the value of shares against which they have lent.
Companies pledge their shares as security with banks when borrowing money. Increased pledging is often seen as a sign of liquidity issues with promoter groups. Banks invoke the pledge on shortfalls, and often end up with a significant stake in the company.
Private sector banks
aren’t the only lenders against pledged shares. A total of 830 companies have pledged shares worth Rs 1.88 trillion, according to the latest BSE data. The value of pledged shares in January was not lower. This would suggest that there has been a shift away from earlier lenders, and that private sector banks
have chosen to take on a greater share.
A March 2019 note on the subject entitled ‘Covering the pledge’ from rating agency CRISIL added that invocation of pledge also has its own issues. For example, there has been at least one instance of a legal challenge which prevented the lender from exercising its rights. This affects their ability to effectively protect their rights and recover their capital.
“In case of a breach of covenants, lenders usually have less than a month to liquidate the shares. However, the domestic equity markets may not have the depth and liquidity to absorb the flood of promoter shares dumped by multiple lenders,” it said.