Mumbai: Promoters of 667 listed Indian firms have pledged their shareholdings as collateral to lenders to raise funds, according to data filed by these firms to stock exchanges. The value of these pledged shares is Rs78,782 crore at Thursday’s closing prices, or 2.14% of total market capitalization.
In January, India’s capital markets regulator, the Securities and Exchange Board of India, or Sebi, made it compulsory for listed entities to disclose information on such share pledges made by promoters.
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Sebi’s move was aimed at improving disclosure and transparency. The market watchdog acted after it was found that Satyam Computer Services Ltd founder B. Ramalinga Raju, who on 7 January confessed to a Rs7,136 crore accounting fraud, had pledged nearly all his stock in the firm with lenders to raise money.
The last date for filing information about share pledges was 31 March.
Companies typically don’t have to disclose such information if their promoters pledged shares in unlisted group firms. Neither do they have to reveal the information about share pledge transactions that have been reversed.
Indeed, only 10 out of the 30 firms that make up the Sensex, India’s most widely tracked equity index, reported such share pledges. Among the Nifty 50 stocks, there were only 12 such firms. Except for one stock, Jaiprakash Associates Ltd, all Sensex stocks are also constituents of Nifty.
India’s most valuable firm, Reliance Industries Ltd, and Bharti Airtel Ltd, the country’s biggest mobile phone company, don’t feature in the list. Both the companies are part of Sensex as well as Nifty.
Several group firms of the Tata group, which has been an aggressive buyer of foreign companies, figure in the list. These include Tata Communications Ltd, Tata Consultancy Services Ltd (TCS), Tata Motors Ltd, Tata Steel Ltd and Tata Power Co. Ltd.
About 13.5% of Tata Steel shares have been pledged. The promoters, Tata Sons Ltd, have also pledged 11% of the total equity of TCS, India’s largest software maker by revenue, and 8% of Tata Motors, India’s largest auto maker by sales.
In 2007 and 2008, the Tata group bought Anglo-Dutch steel maker Corus Plc. for about $12 billion and Ford Motor Co.’s Jaguar and Land Rover units for about $2.3 billion.
Two firms owned by the Reliance-Anil Dhirubhai Ambani Group—Reliance Communications Ltd and Reliance Infrastructure Ltd—also feature in the list. The promoter pledged 13% of shares in the communications firm and 16.3% of the total stock in the infrastructure company.
In 26 of the 667 firms, promoters have pledged at least 50% of equity and theoretically they run the risk of losing control. In some cases, lenders had earlier threatened to liquidate the shares, offered as collaterals, because of a slump in share values. The scene has changed with the recent rally in the stock market. The Sensex has risen close to 27% in the past three weeks.
When share prices decline, lenders typically ask for more shares to be pledged as collateral and if the borrowers fail to do so, the lenders sell the pledged shares to recover money.
To be sure, there is nothing illegal about pledging shares. Investment bankers say that private lenders have always asked for shares to be put up as collateral when they lent money.
Investors, too, have not reacted adversely to firms that have disclosed such pledging of shares by their promoters. In fact, except for Wockhardt Ltd, India’s sixth largest drug firm by sales, almost all firms have seen their share prices rise despite promoters’ pledging of shares.
The promoters of Wockhardt have pledged about 59% of their holdings in the company to raise money. Since they disclosed it to the stock exchanges, the stock price has lost about 21%. The reason behind this could be the high debt burden of the company that is now being referred to the corporate debt restructuring cell of Indian banks.
Liquor maker United Spirits Ltd has disclosed that its owners have placed almost 90.8% of their holdings as collateral. The stock price has not gone down since the announcement. Other firms such as realty firm Unitech Ltd and Tata Motors have seen at least a 40% rise in stock prices since their promoters revealed that they had pledged shares in the companies.
Tata Coffee Ltd has pledged 57.48% of the company’s equity. The owners of real estate firm Akruti City Ltd have pledged 60.98% of total paid-up shares and Parsvnath Developers Ltd 63.1%.
Companies, irrespective of their size and the business they are in, have seen their promoters pledge shares. The list includes not only the likes of Tata Steel and Mahindra and Mahindra Ltd, the maker of tractors and sports utility vehicles, but also smaller firms such as pen maker Today’s Writing Products Ltd, whose promoters have pawned half the company’s equity.
Sebi’s ruling does not ask promoters to reveal the end-use of the money they raised by pledging shares. It also doesn’t ask promoters to reveal the share price at which they pledged these shares and who these lenders are.
Some 173 firms reported that promoters have pledged at least half of their personal holdings.
Graphics by Ahmed Raza Khan / Mint