Thanks to the scam of Ramalinga Raju, India Inc has ushered in a new era of corporate governance. And till now, pledged shares which was an alien concept to us, has now become the buzz word. Along with the net profit, EBIDTA margins, operating costs, exceptional gains/losses, investors now have one more parameter to judge the company and the management.
In the aftermath of the Satyam, scam, SEBI made it mandatory for promoters to disclose the number of shares pledged by them - details of pledged shares if the same exceeds 25,000 shares in a quarter or 1% of the total shareholding or voting rights of the company, whichever is lower.
This is an excellent move as it indicates two things whether or not the company has a liquidity crisis and to what extent have the promoters leveraged the company. The credibility of the management and their holding in the company has become one of the most important parameters, based on which an investor make a decision.
Its like SEBI has opened up a dam, what started as a trickle has now become a torrent and it comes as a complete shock to know that so many companies have pledged their shares. The list is only expected to get longer. The moment any company discloses its pledged shares, it is hammered down to a pulp and it becomes untouchable for some time. In a bull market, this information might not have made much of a difference but now with so much negative sentiments in the market, this information increases the air of pessimism. Caution, along with transparency is the buzzword on the streets.
Most of the promoters pledge their shares as mortgage for raising money and the reasons for raising money ranges from meeting needs of working capital to funding expansions abroad. In some cases, it is also used as a collateral security to get in investors. For eg: In Kitply Industries, promoters have pledged 35.19% of their holding, not for raising any funds but the shares are pledged with investors, who have put in about Rs 100 crore.
When shares are pledged for these regular reasons, as the days go by, the market will learn to take this news in its stride and may not react as much. But when promoters pledge shares to raise money to buy up their own shares, to hike their stakes in the company, as was the case of Nagarjuna Construction, investors might not be forgiving. Surprisingly, Asian Paints too did that where promoters - Dani and Choksi pledged 14.98% of their stake in the company to increase their holding in the company from 40% to 50%.
Then there are companies like PeninsulaLand where promoters have pledged shares as second collateral against the primary collateral of land and buildings. Such kind of pledges cast aspersions on the quality of management and it should be taken as a red blaring light, like a siren, a warning to stay off.
In some cases, promoters have pledged almost 100% of their holdings, like in the case of MRO Tek, Micro Inks and even a company as big as GE Offshore has risked the ownership.
Then there are many companies who have issued a press release to the stock exchange, categorically stating that its promoters have not pledged any shares ABG Shipyard, Transport Corporation of India, Educomp, Everest Kano, Siyaram Silk, to name a few. Their objective is probably to cull any rumours that might float and also to assure its investors that they are in the clear, promoters are above the board and they are not in any major financial crisis.
In these disclosures of pledged shares, there is one loophole which SEBI needs to correct. It has made it mandatory to disclose only the quantity of shares pledged, leaving it to the discretion of the company to state the name of the bank with whom they have pledged and also the purpose of pledging. SEBI should thus make it mandatory for companies to disclose the purpose and the bank with which it has pledged the shares.
So in the coming days, when big ticket companies announce their pledged shares, the markets could go for a spin. Yes, getting information is good because it would be worse to live in ignorance and have one more Satyam outbreak.
Sources SP Tulsyan & By Ruma Dubey
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