Now, promoters take pledging to new heights
The Economic Times, February 27, 2009, Page 9
Shikha Shrama & Sanjeev Choudhary ETIG ET BUREAU
AN ETIG study based on disclosures made by 467 listed firms shows the promoter group of 27 companies has pledged more than 90% of its holding. Well-known listed companies in this category include Kirloskar Electric, JP Hydropower, ERA Infra Engineering and Micro Inks.
Promoters of another 38 companies, including realty firms Unitech and Parsvnath besides other large firms such as Tata Teleservices (Maharashtra) and India Cements Capital, have pledged over 70% of their holding
When the promoter group pledges a high proportion of its shares, the firm is potentially vulnerable to management change, although so far there are just three cases of a promoter actually losing control as a result of pledging shares.
In case of Satyam, founder B Ramalinga Raju had got the IT firm’s board to approve purchase of a company owned by his family at a phenomenal valuation. This was done at a time when almost his entire stakeholding was pledged. Following the Satyam case, market regulator Sebi has made it mandatory for listed companies to disclose details of pledged shares.
“Usually a lender gives a loan worth 60% of the value of shares and if the share price falls, a margin call is triggered. There is a risk of management change if the quantum of shares pledged is high,” says Prithvi Haldea of Prime database, an independent market research firm. He points out that some promoters may even be tempted to manipulate profits of the company to keep the share prices inflated and avoid triggering selling of shares.
Promoters of a fourth of all companies in the study have pledged more than half of their total stake. Most of them haven’t disclosed either the object or the institutions with which shares have been pledged. Shares owned by promoters are pledged either for their personal borrowings or as a collateral with banks and other financial institutions against borrowings by the company. If the value of shares drops significantly, as is the case currently, banks ask for more shares or some other collateral.
If the firm or the promoter fails to furnish the extra amount the lenders can sell the shares in the market.
Some firms, however, say there is not a significant risk of sale of such shares in the market. Consider the case of power firm JP Hydropower where promoters have pledged around 59% of their total 63% in the company. “These pledged shares are only secondary securities. The primary security is the project for which finance is made available,” argues a senior executive of JP Hydropower.
Moreover, these shares are not really linked to market prices and do not trigger margin call, as they are meant to ensure lenders have control over the company in case of a default. JP Hydro shares were pledged before it was listed.
“There is definitely a case for more disclosure, which will bring in more transparency in the way promoters and companies function,” says Indiabulls Financial Services CEO Gagan Banga. Indiabulls is an NBFC with which many promoters have pledged shares.
Mr Haldea says these are early days. “We will learn lessons as we go along. It’s debatable if companies need to disclose the object, name of lenders and even use of funds. But the focus should only be on disclosures that are relevant and useful for investors.”
There are also firms where one of the co-promoters has pledged a large part of his stake. So even though the proportion of pledged shares of the total promoter holding is not significant, if margin calls are triggered, it could see one of the co-promoters losing part control of the company.
One such example is UTV Software in which the original Indian promoter group of the company has pledged 22.7% out of 23.3% held in the company. But the majority stake in the firm is now owned by Walt Disney(59.9%) and as a result, percentage of promoter group holding pledged would not be significant.
The Economic Times, February 27, 2009, Page 9
Shikha Shrama & Sanjeev Choudhary ETIG ET BUREAU
AN ETIG study based on disclosures made by 467 listed firms shows the promoter group of 27 companies has pledged more than 90% of its holding. Well-known listed companies in this category include Kirloskar Electric, JP Hydropower, ERA Infra Engineering and Micro Inks.
Promoters of another 38 companies, including realty firms Unitech and Parsvnath besides other large firms such as Tata Teleservices (Maharashtra) and India Cements Capital, have pledged over 70% of their holding
When the promoter group pledges a high proportion of its shares, the firm is potentially vulnerable to management change, although so far there are just three cases of a promoter actually losing control as a result of pledging shares.
In case of Satyam, founder B Ramalinga Raju had got the IT firm’s board to approve purchase of a company owned by his family at a phenomenal valuation. This was done at a time when almost his entire stakeholding was pledged. Following the Satyam case, market regulator Sebi has made it mandatory for listed companies to disclose details of pledged shares.
“Usually a lender gives a loan worth 60% of the value of shares and if the share price falls, a margin call is triggered. There is a risk of management change if the quantum of shares pledged is high,” says Prithvi Haldea of Prime database, an independent market research firm. He points out that some promoters may even be tempted to manipulate profits of the company to keep the share prices inflated and avoid triggering selling of shares.
Promoters of a fourth of all companies in the study have pledged more than half of their total stake. Most of them haven’t disclosed either the object or the institutions with which shares have been pledged. Shares owned by promoters are pledged either for their personal borrowings or as a collateral with banks and other financial institutions against borrowings by the company. If the value of shares drops significantly, as is the case currently, banks ask for more shares or some other collateral.
If the firm or the promoter fails to furnish the extra amount the lenders can sell the shares in the market.
Some firms, however, say there is not a significant risk of sale of such shares in the market. Consider the case of power firm JP Hydropower where promoters have pledged around 59% of their total 63% in the company. “These pledged shares are only secondary securities. The primary security is the project for which finance is made available,” argues a senior executive of JP Hydropower.
Moreover, these shares are not really linked to market prices and do not trigger margin call, as they are meant to ensure lenders have control over the company in case of a default. JP Hydro shares were pledged before it was listed.
“There is definitely a case for more disclosure, which will bring in more transparency in the way promoters and companies function,” says Indiabulls Financial Services CEO Gagan Banga. Indiabulls is an NBFC with which many promoters have pledged shares.
Mr Haldea says these are early days. “We will learn lessons as we go along. It’s debatable if companies need to disclose the object, name of lenders and even use of funds. But the focus should only be on disclosures that are relevant and useful for investors.”
There are also firms where one of the co-promoters has pledged a large part of his stake. So even though the proportion of pledged shares of the total promoter holding is not significant, if margin calls are triggered, it could see one of the co-promoters losing part control of the company.
One such example is UTV Software in which the original Indian promoter group of the company has pledged 22.7% out of 23.3% held in the company. But the majority stake in the firm is now owned by Walt Disney(59.9%) and as a result, percentage of promoter group holding pledged would not be significant.
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