Mumbai: The inability of Indian promoters to repay loans taken against pledged shares has resulted in stock worth about 600 crore being sold in the open market this year till date, the highest ever in the history of the capital market and almost seven times the amount for all of 2011.

The promoters whose shares have been sold include those of JSW Steel Ltd, Unitech Ltd, Orbit Corp. Ltd, S Kumars Nationwide Ltd, OnMobile Global Ltd, Ansal Properties Infrastructure Ltd, Shriram EPC Ltd and Andhra Cements Ltd among several others, according to stock exchange data.

Emails sent to JSW Steel, Orbit Corp., S Kumars, Ansal and Shriram on Wednesday and follow-up phone calls did not elicit any response.

A Unitech spokesperson said, “The promoter shareholding continues to remain the same and is unchanged. Unitech is focusing on execution of its projects and will continue to create value for all its stakeholders."

Pledging of shares is among the easiest of ways for promoters of listed Indian firms to raise debt and is mostly done to raise working capital loans. When the loan can’t be paid, pledged shares are invoked, transferring them to the lender, who sells the stock to recover the money.

A slowing economy, high interest rates and untamed inflation have combined to put the squeeze on companies.

If the loan is not repaid before the promised date or if the market value of the stock drops and the promoter fails to bring in fresh capital or additional shares to replenish the shortfall, the shares are invoked.

Still, this is uncommon even during the worst phases of the equity markets. That’s because it’s unusual for borrowers not to repay the loan or bring in additional shares.

Analysts blame the trend on the prolonged weakness of the Indian equity markets and the dearth of working capital.

According to data from BSE Ltd and the National Stock Exchange of India Ltd (NSE), shares worth 87crore were invoked in 2011 when the BSE bellwether index, the Sensex, was down 24.64%. No shares were invoked in 2010 and 2009, according to market data provider Capitaline.

The Sensex is trading 20.42% up from its year-opening levels, but most of these gains have come in the last few weeks (after 14 September) following the government introducing a series of reforms such as opening up foreign direct investment in multi-brand retail.

The Sensex rose 33.07 points, or 0.18%, to close at 18,610.77 points on Wednesday.

“For the last few years, equity markets were bad so companies could not raise public funds and thus pledging was high as they needed money for funding projects," said S.B. Nayar, deputy managing director (corporate banking) at State Bank of India.

“Private equity players were also not investing as they too were apprehensive of the market scenario. Thus, when pledging is high and companies are not able to meet margins in a sluggish economy, revocation is unavoidable, and it is happening now," Nayar said.

Rampant invocations indicate a serious capital crunch due to poor primary markets, weak secondary markets and low business profit margins for a prolonged period, said an equity capital market expert at a large domestic financial services firm. He did not want to be named.

“Certain shares have fallen more than the market, while some have shown a secular decline. In some cases, the promoter needs money and hence the pledged shares are sold. The total value of such (pledged) shares could be around 60,000 crore and there will be many companies which have pledged shares, including a large liquor firm and a mining firm," said Vimal Bhandari, managing director and chief executive officer of Indostar Capital Finance Pvt. Ltd, which also lends against shares.

Several promoters are attempting to reduce pledged shares to protect market reputation, say experts.

“Now that disclosure of pledged shares is mandatory, several promoters who used the share pledging route to leverage were exposed," said Nirmal Jain, chairman of India Infoline Ltd.

“Investors do not view this information positively. These are legacy issues now and only those promoters who are comfortable and who own 50% or so in the company do this," said Bhandari.

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