What is Share Pledge
Definition: Pledging of shares is one of the options that the promoters of companies use to secure loans to meet working capital requirement, personal needs and fund other ventures or acquisitions. A promoter shareholding in a company is used as collateral to avail a loan. While pledging shares, promoters retain their ownership. However, as the share price keeps fluctuating, the value of the collateral also changes. When the value of the shares pledged with a lender falls below a certain level, it triggers ‘margin call’, requiring the promoters to make up for the shortfall in the value of the collateral.
Description: Share pledge can be troublesome for companies at times, as promoters are required to maintain the value of the collateral all the time by providing additional shares to lenders when their value erodes. In case promoters fail to make up for the difference, lenders can sell the shares in the open market to recover the money. This can lead to a reduction in the promoters’ shareholding in the company, further value erosion in the stock due to infusion of additional paper in the market, and even sudden change of guard in the company because of alteration in shareholding pattern.
India’s securities market regulator, Sebi, has formulated certain rules and regulations on appropriate disclosure of such borrowings in the wake of the Satyam scam that broke in 2009. In February 2013, fears of margin call triggered selling in many midcap and smallcap stocks in the Indian market.
Share pledging is a standard way of accessing funds for companies, but bitter experiences in the past have created a negative impression about the instrument, as it signals poor cash flow patterns, credit crunch in a company and promoters’ inability to meet short-term working capital requirements. Promoters often make such share pledges for personal needs as well.
According to a report by the “Economic Times”, 25 Indian companies had their entire promoter holdings pledged with lenders as of March 2015 while 77 others had 90 per cent of promoter holdings and 200 had 50 per cent of promoter equity pledged with their lenders.
Description: Share pledge can be troublesome for companies at times, as promoters are required to maintain the value of the collateral all the time by providing additional shares to lenders when their value erodes. In case promoters fail to make up for the difference, lenders can sell the shares in the open market to recover the money. This can lead to a reduction in the promoters’ shareholding in the company, further value erosion in the stock due to infusion of additional paper in the market, and even sudden change of guard in the company because of alteration in shareholding pattern.
India’s securities market regulator, Sebi, has formulated certain rules and regulations on appropriate disclosure of such borrowings in the wake of the Satyam scam that broke in 2009. In February 2013, fears of margin call triggered selling in many midcap and smallcap stocks in the Indian market.
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Share pledging is a standard way of accessing funds for companies, but bitter experiences in the past have created a negative impression about the instrument, as it signals poor cash flow patterns, credit crunch in a company and promoters’ inability to meet short-term working capital requirements. Promoters often make such share pledges for personal needs as well.
According to a report by the “Economic Times”, 25 Indian companies had their entire promoter holdings pledged with lenders as of March 2015 while 77 others had 90 per cent of promoter holdings and 200 had 50 per cent of promoter equity pledged with their lenders.
