Mumbai: In the same week that India’s capital markets regulator asked companies to disclose to shareholders the shares pledged by promoters to raise funds, at least two research firms have separately identified 12 firms whose promoters have pledged millions of company shares as collateral for loans even as investors have become more wary of investing in such companies
A 19 January study by Credit Suisse Securities (India) Pvt. Ltd identified significant share pledges by the promoters of four large companies—UB Group, Gammon India Ltd, Nagarjuna Construction Co. Ltd (NCC) and Jaiprakash Associates Ltd (JAL)—from a list of 90 widely tracked firms. The equity research firm analysed these companies for structural, accounting and transactional risks as well as the history of their promoters.
In a separate report on 23 January, titled “Promoter holding, survey of shares pledged”, local brokerage Prabhudas Lilladher Pvt. Ltd disclosed the names of eight more companies whose promoters have pledged shares: KEI Industries Ltd, Gayatri Projects Ltd, Rolta India Ltd, Bharati Shipyard Ltd, Peninsula Land Ltd, Shree Renuka Sugars Ltd, Indage Vinters Ltd and XL Telecom and Energy Ltd.
Both reports identified the promoter pledges without specifying if any of these posed particular risk to investors.
Key promoters and their holdings are potential indicators of corporate governance risk for a company, Credit Suisse analysts Govindarajan Chellappa and Swapnil Nadkar said in their report, titled “Corporate India, hand book of qualitative factors and subtitles frame work to corporate governance”.
“While there can be exceptions—and Satyam is a case in point—generally risk is perceived to be higher in companies where promoter shareholding/vote share is high, as this makes it structurally easier to pass resolutions that might not be in the interest of the minority shareholder,” the analysts wrote.
Promoters pledging their shares has raised concerns in recent months about investing in such companies as lenders have threatened to liquidate the collateral because of the sharp slump in the value of their holdings. It is difficult to identify such borrowings because lenders and promoters sign non-disclosure agreements on loan transactions.
Investor fears about such loans also increased after it was found that B. Ramalinga Raju, who confessed to an accounting fraud of Rs7,136 crore at Satyam Computer Services Ltd, the company he founded, had pledged almost all of his shares with private lenders to raise cash.
As per the Credit Suisse study, United Spirits Ltd (USL), part of the Vijay Mallya-owned UB Group, had in fiscal 2008 financed group firms through loans and equity contributions amounting to Rs670 crore, or 33% of its net worth that year.
In addition, USL gave guarantees and collateral totalling Rs2,480 crore to its group companies. United Breweries (Holdings) Ltd, the parent company of USL and Kingfisher Airlines Ltd, had also pledged about 10% of its holding stock in the spirits company to secure loans taken by its subsidiaries, the analysts said.
A Mint investigation in December had disclosed that Mallya had pledged shares of one or more of his group companies with Indiabulls Financial Services Ltd.
“We...genuinely feel that it is our core business to leverage on existing assets to create new assets,” said Ravi Nedungadi, chief financial officer of the UB Group.
He added that UB Holdings’ mandate was to raise funds. “For raising funds, one will have to either sell shares or leverage out of the existing assets. And there is nothing new as we have been doing this for last 20 years,” he said over phone on Friday. “These pledges are not made as primary securities by secondary additional collaterals. Loans are always raised over the assets and cash flows of the company, but the banks and lenders demand for additional collaterals. Providing this is precisely the job of a holding company.”
The Credit Suisse study also noted that as per JAL’s 2008 annual report, shares of its listed subsidiary Jaiprakash Hydro-Power Ltd and the unlisted Jaiprakash Power Ventures Ltd, Jaypee Hydro Corp. and Jaypee DSC Ventures were pledged with banks and financial institutions as collateral. JAL is a constituent of the30-stock Sensex index.
Jaiprakash Power, the holding firm for the power assets of JAL and operator of a 400MW hydro power plant, had filed a draft prospectus for a public offer of shares on 8 January 2008.
Three days before the prospectus was filed, the Jaypee Group Employees Welfare Trust bought eight million shares of Jaiprakash Power for Rs15 per share, the Credit Suisse analysts said.
On the same day, ICICI Bank Ltd and State Bank of India were allotted 10.5 million and five million shares of Jaiprakash Power, respectively, at Rs234 a share.
As for Gammon, the Credit Suisse analysts said some of Gammon Infrastructure Projects Ltd’s (GIPL) subsidiaries had pledged their shares with banks and financial institutions as collateral, as per its 2008 annual report.
The Hyderabad-based promoters of road and real estate developer NCC have also pledged shares of various subsidiaries with lenders. NCC had loaned Rs230 crore, or about 9% of its balance sheet size, to unlisted real estate subsidiaries NCC Urban Infrastructure Ltd and NCC Vizag Urban Infrastructure Ltd, the analysts said.
A GIPL spokesman said only the group’s unlisted subsidiaries had pledged shares with lenders. These subsidiaries are special purpose vehicles that undertake infrastructure projects, he added.
Y.D. Murthy, executive vice-president (finance) of NCC, confirmed that promoters of the company have pledged 12% of their shares to avail loans. Some of these loans were given to subsidiaries, he added.
Calls made to a senior executive of JAL remained unanswered.
The stake dilution in NCC Vizag to 95% in 2008 from 100% in March 2007 is a matter of concern as prior approval from minority shareholders wasn’t taken, said Amish Shah, another Credit Suisse analyst who participated in the study.
Capital markets regulator Securities and Exchange Board of India had on 21 January announced that promoters who pledge their shares would have to disclose such deals to the bourses, responding to investor concerns of the mounting risks of investing in such firms.
On 19 January, Mint reported that the sum of outstanding loans raised through pledged promoter holdings was about $4-5 billion (about Rs19,680-24,600 crore today). Overall, some $15 billion worth of shares had been pledged, according to 12 senior executives at large foreign and local brokerages, non-banking finance companies and investment banks.
The size and scale of such loans came to light after the sharp slump in stock prices between mid-September and end-October.
Margin calls triggered during this period led to some stocks collateral being sold and many promoters knocking doors to pay back. The intense liquidity squeeze during this period, after the collapse of Lehman Brothers Holdings Inc., added to the woes of promoters.
For instance, Mint had reported in November that Vijay Kantilal Sheth, vice-chairman and managing director of Great Offshore Ltd, was in danger of losing control over the company after lenders threatened to sell shares he had pledged with them if he couldn’t meet the fall in stock prices.
P.R. Sanjai contributed to this story.