Margins will rise for highly pledged companies, say market players

Topics pledged shares

Investors will have to cough up higher margins while dealing in stocks with high promoter share pledges. Stock exchanges have directed brokers to impose a higher margin on their clients, both in the cash and derivatives segments, for stocks where total promoter pledging exceeds 25 per cent of total equity.

Market players said the move is to mitigate risks arising from liquidation of pledged shares by lenders, in an event where the promoter is not able to provide enough collateral. Recently, several companies had seen their stock prices slide due to invocation and selling of pledged shares, hurting the interest of minority investors.

“The Securities Exchange Board of India (Sebi) and exchanges, in a joint meeting, have decided to levy a minimum margin of 35 per cent on stocks (including stocks in the derivatives segment) that satisfy the following criteria: market capitalization greater than Rs 1,000 crore, where the pledged holding of the promoter accounts for more than 25 per cent of the total number of shares issued by the company, where the concentration of top 25 clients in trading during the last 30 days is 30 per cent or more, and the high-low price variation in the scrip in the last three months is greater than 40 per cent,” reads a circular issued by the National Stock Exchange.

In the cash segment, there are 37 stocks where the market cap exceeds Rs 1,000 crore, and percentage of promoter pledging is more than 25 per cent of the total equity. In the derivatives segment, there are seven such stocks. Data on client concentration and stock price variation wasn’t immediately available. However, market players said the latest circular could impact about two dozen stocks.

  • Exchanges have raised margins for stocks with high promoter pledge 
  • Three dozen stocks in cash segment, seven in F&O segment likely to be impacted
  • These stocks could see a dip in trading volumes
  • Market players say the move is unfair on investors
  • Sebi has recently tightened disclosure norms pertaining to share pledging
Some criticized the move, saying traders were being punished for the actions of promoters.

"It's another round of inconvenience for investors. Penalising the lay investor with more margins for the actions of promoters and lenders is not fair. Moreover, it's a step which is too little, too late. In many cases, the value destruction has been tremendous, and stocks have already tanked 80 per cent. On the positive side, investors will be alerted the moment the broker asks for a higher margin, and he will be in a position to make an informed call," said Alok Churiwala, MD, Churiwala Securities.

In recent months, both investors and regulators have frowned upon companies with high promoter pledging.

In August, Sebi had tightened disclosure norms for companies with high promoter pledging. Under the new norms, companies have to furnish detailed reasons for any kind of encumbrance on shares belonging to promoters. Companies have to furnish details on the end use of money and security cover provided. Also, Sebi has widened the definition of encumbrance to include direct and indirect pledge, liens and non-disposal undertakings.

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