Promoters may have to pledge more shares as collateral

Promoters may have to pledge more shares as collateral

Mumbai: Lenders to some listed Indian companies might make promoters pledge more shares as collateral against loans, as the values of the stakes already put up may have diminished in the recent fall on the bourses.

Of the top 100 companies on the Bombay Stock Exchange (BSE), promoters of 27 firms have pledged portions of their shareholdings with financial institutions. The extent of the pledges is as high as 88% of the promoters’ holdings.

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Promoters usually offer a portion of their shareholding as collateral to lenders while borrowing. After setting aside a margin, lenders offer the remaining market value of the pledged stake as a loan.

Typically, when the current market value of the pledged stake falls below the level at which the loan was availed, banks may ask the borrower to furnish additional shares as collateral.

Banks typically use pledged shares as collateral to exercise some control on the management of borrowing companies, according to R.K. Bakshi, executive director of Bank of Baroda.

“In cases where banks lend against shares to individuals, there is a 50% margin forit," Bakshi said. “When the share price falls below the rate at which the loan has been given, banks tell borrowers to bring in additional shares or pay the difference to maintain the value of the loan in the books."

Outside the BSE-100, promoters of some companies have pledged almost their entire holding in a company as collateral against debt.

For instance, Tata Global Beverages Ltd, a Tata Group firm that owns 57.48% in another listed entity, Tata Coffee Ltd, has pledged its entire holding in the company.

Other such companies include paint maker Jenson and Nicholson (India) Ltd, where 96.27% of the promoters’ stake in the company is locked with financial institutions as collateral.

If the promoter cannot offer further shares, lenders may sell a portion of the stake pledged with them.

Such type of promoter funding is mostly done by non-banking financial companies (NBFCs), said S.P. Tulsian, a Mumbai-based independent stock market analyst.

“Normally, NBFCs may lend up to a third of the value of the shares pledged with them by promoters," Tulsian said. “If the value diminishes, these institutions can ask for more shares to make good the shortfall."

The situation is not worrisome yet, said the country head of a foreign NBFC with operations in India, but his firm was monitoring the situation. He declined to be identified.

“Cases of defaults by Indian promoters is rare as they usually keep topping up, either with more shares or cash," the NBFC executive said.

Graphic by Yogesh Kumar/Mint