Lack of access to cheaper capital and no signs of an earnings recovery have had a negative impact on mid-sized and small firms and their promoters, say experts
The pledged shareholdings of company promoters has not changed much over the past 12 quarters despite many firms selling their assets to pay down debt.
The percentage of holdings pledged by promoters was 10.2% at the end of September, a marginal increase from the preceding quarter, according to a Mint study of 70 of BSE 500 companies, whose promoters have pledged shares for at least 30 quarters.
Lack of access to cheaper capital and no signs of an earnings recovery have hit the mid-sized and small firms and their promoters hard, experts say.
“Any protracted slowdown will only reduce their avenues," said Tirthankar Patnaik, India strategist at Mizuho Bank Ltd. “This could be a reason for promoters pledging their shares."
Promoters of a company usually pledge their shares as collateral to garner funds, which can be used in the same business or outside it. A high pledge level by the promoter group makes investors cautious because a steep correction in the market price can trigger invocation of pledged shares, which can lead to further sharp declines.
From the beginning of the financial year till the end of September, the benchmark Sensex rose 9.96% while mid-cap stocks rose even faster, giving promoters some leeway to revoke shares in theory. But that hasn’t happened.
Patnaik of Mizuho pointed out that while the larger companies have seen a fall in cost of capital due to recent interest rate cuts, this has not necessarily percolated to smaller firms as they do not have access to wholesale markets.
Firms will look to tap all available sources during extended periods of distress.
An improvement in pledging would depend on the corporate earnings cycle, said Ajay Bodke, chief executive and chief portfolio manager at Prabhudas Lilladher Pvt. Ltd.
“The expectation is that earnings will start to pick up in the second half of the financial year following the Seventh Pay Commission (report implementation). An improvement in rural demand has also been expected post-harvest," he said.
But the prospects of a US rate hike as early as December and the victory of Donald Trump in the US presidential election have led to diminishing risk appetite in emerging markets stocks.
In India, the government’s withdrawal of high-value banknotes too has added to pressure on stock prices, with the Sensex shedding 7.7% in the past 30 trading sessions.
That will make it difficult for promoters to redeem any shares; some may even have to increase pledges as collateral.
Among these 70 companies, those belonging to the capital goods sector was the worst-placed, with 74.91% of the promoters’ holding pledged, followed by banks and financial institutions at 63.21%.
There were at least 11 companies, which had 70% or more of their promoters’ holdings pledged, while for 28 companies, it was below 10%.
As far as individual companies are concerned, for Videocon Industries Ltd, almost the entire promoters’ holding in the company—about 98.8%—was pledged, which has been the case for the past five quarters.
Promoter holdings of 95.75%, 95.42% and 94.05% of Suzlon Energy Ltd, Alok Industries and Gayatri Projects Ltd, respectively, were pledged at the end of the September quarter.
Religare Enterprises Ltd saw the biggest jump in terms of the promoters’ pledged holdings for the September quarter compared to the preceding quarter. Shares pledged by promoters in the company rose to 86.87% from 76.8% between the two time periods.
Crompton Greaves Ltd promoters’ pledged holdings dropped the most to 58.73% in the September quarter from 84.2% at the end of the June quarter.