Mumbai: The rebound in stock prices since the start of the current fiscal has increased the notional wealth of company promoters and helped them redeem part of the stock they pledged in return for funds when the going wasn’t so good.
At least 77 of the 667 companies whose promoters pledged their shareholdings last year have repaid their creditors and redeemed their collateral, according to data filed by these firms with stock exchanges.
The companies include realtor Unitech Ltd, auto maker Tata Motors Ltd, software firm Tata Consultancy Services Ltd (TCS), wind turbine manufacturer Suzlon Energy Ltd, Jindal Steel and Power Ltd, and construction and cement company Jaiprakash Associates Ltd.
In the last fiscal, when the world plunged into a financial crisis and credit crunch as liquidity dried up, many promoters were forced to pledge part of their shareholdings as collateral to raise cash.
As of 31 March, the value of the total amount of shares pledged was about Rs78,000 crore.
Several top companies did not pledge their shares. In fact, only one-third of the firms that make up the Sensex reported such share pledges. Among the National Stock Exchange’s Nifty 50 stocks, there were only 12 such firms.
The promoters of India’s most valuable firm, Reliance Industries Ltd, and Bharti Airtel Ltd, the country’s biggest mobile phone company, have not pledged their shares. Both the companies are part of the Sensex as well as Nifty.
The current rally in the stock markets has changed the scenario. The Bombay Stock Exchange’s (BSE) Sensex, India’s most widely tracked equity index, has gained about 54% since the start of the fiscal year on 1 April.
When share prices decline, lenders typically ask for more shares to be pledged as collateral. If the borrowers fail to do so, the lenders sell the pledged shares to recover money.
Conversely, when there is a sharp rise in stock prices, fewer shares have to be pledged as collateral to raise the same amount.
Indeed, many companies have not redeemed all their shares.
For instance, the promoters of Suzlon Energy have redeemed one-third of the shares they pledged.
The wind energy firm’s promoters had pledged 25.85% of the company’s equity, or 387.2 million shares, to lenders.
Promoters of Tata Chemicals Ltd have redeemed 12.74% of the pledged shares. Three of its promoters—Tata Tea Ltd, Tata Sons Ltd and Tata Investment Corp. Ltd—had pledged 20.02% of the company’s equity with their lenders.
Similarly, Tata Sons Ltd, promoter of TCS, also partially redeemed last week the shares it had pledged with lenders.
According to Gopal Agrawal, head of equity at Mirae Asset Management, the promoters of Indian companies are becoming cautious and reducing their debt levels. However, he is not reading too much into this as “when prices (of shares) are going up, it’s normal to redeem shares”.
Analysts also noted that many promoters are unwinding their positions as they come into money, with the economy looking better.
While the credit growth rate has not reached the breakneck speed of the boom years between 2003 and 2007, it has improved, and companies are seeing higher demand from consumers.
Indeed, broking firm Motilal Oswal Securities Ltd said “the worst is over” for Indian company earnings.
“From a quarter of ‘fading darkness’, we move on to a quarter of ‘new hope’,” it said in its quarterly earnings preview report for the three months ended June.
Software bellwether Infosys Technologies Ltd is to kick off the earnings season on Friday.
The Index of Industrial Production, or IIP, grew 1.4% in April, the first time in four months that it did not decline, even as exports continued to contract in May.
The World Bank has upgraded its growth estimates for India this year to 5.1% from an earlier 4%, and expects India to be the fastest growing major economy next year.
There is nothing illegal about pledging shares. Investment bankers say private lenders have always asked for shares to be put up as collateral when they lend money. They didn’t have to make this information public.
But after it was found that Satyam Computer Services Ltd founder B. Ramalinga Raju, who in January confessed to a Rs7,136 crore accounting fraud, had pledged nearly all his stock in the firm with lenders to raise money, the Securities and Exchange Board of India made it compulsory for listed entities to disclose information on share pledges by promoters in a bid to improve transparency.
Companies typically don’t have to disclose such information if their promoters pledge shares in unlisted group firms.