Pledging of shares to raise capital back in vogue

Pledging of shares to raise capital back in vogue

Mumbai: The trend of promoters of Indian firms pledging shares to raise money is back.

In some cases, promoters are pledging shares of their smaller group firms to raise debt to fund the parent company’s growth, acquisition and even buy-back of shares from the market, while instances of stakes held by group firms in the parent company being pledged are also on the rise. A few of them are doing it purely for interest rate arbitrage— money raised through the pledge of shares costs less than bank loans, particularly in a tight-liquidity situation.

At least half a dozen promoters have raised money through this route over the past month.

According to data available with the Bombay Stock Exchange, promoter and promoter group firms of United Breweries Holdings Ltd (UBHL), Apollo Tyres Ltd, JSW Steel Ltd, JSW Energy Ltd, Pantaloon Retail (India) Ltd, Future Capital Holdings Ltd, Hero Corporate Services Ltd, REI Agro Ltd and Surya Pharmaceutical Ltd have pledged shares to raise money.

In most instances, over-leveraged parent companies are struggling to offer collateral to raise money from lenders.

Group firms of JSW Steel, owned by Sajjan Jindal, pledged shares held in the company to raise money to purchase rival steel maker Ispat Industries for 2,157 crore. Other group firms’ shares such as JSW Energy and JSW Cement were also pledged by the promoter to raise money for JSW Steel.

Vrindavan Services Pvt. Ltd and JSW Investments Pvt. Ltd pledged stakes of 4.82% and 8.38%, respectively, in JSW Energy to raise money.

Seshagiri Rao, JSW Steel’s group chief financial officer, did not respond to phone calls.

Bahadur Chand Investments Pvt. Ltd, a group investment firm of Hero Corporate Services, has pledged a 4.8% stake in Hero Honda Motors Ltd after the Hero Group agreed to purchase partner Honda Motor Co. Ltd’s stake in the motorcycle maker.

In two separate transactions, the firm pledged shares to Axis Trustee Services and IDBI Trusteeship Services Ltd for a loan the company raised against the holding in Hero Honda. An email sent to the company did not elicit any response.

“With many Indian companies not being free cash-flow positive, external financing is the only option," said Saurabh Mukherjea, head of equities at Ambit Capital Pvt. Ltd. “With balance sheets of parents overleveraged and in a rising interest-rate scenario, coupled with volatile equity markets, promoters have to finance their company’s growth using holdings in group companies."

Banks are over-cautious in a tight-liquidity scenario, said an analyst with a domestic brokerage firm tracking JSW Steel. “The lenders sought comfort in personal guarantees like share pledges by the promoters," he said.

Over-leveraged balance sheets are not the only reason for share pledges.

“The difference in interest rates offered for a term loan facility and through pledge of shares is as high as two percentage points," said Mukherjea. “Hence, for a promoter, it is more convenient to raise money by pledging shares."

As a rule of thumb, banks and financial institutions offer around 50% of the price of every share pledged as loan.

UBHL, which holds a 24% stake in Mangalore Chemicals and Fertilizers Ltd, has pledged half of that to raise money. A senior company official said it was a technical procedure where the earlier pledged shares were revoked and pledged again with a bank for a fresh loan.

Apollo Tyres promoters pledged equity held by three group firms to raise money to buy shares from the market. Sunrays Properties and Investment Co. Pvt. Ltd, Neeraj Consultants Ltd and Motlay Finance Pvt. Ltd have pledged a total 12.32% stake in the company.

“The promoters have raised money to buy shares in the company by way of creeping acquisition as permitted by the Securities and Exchange Board of India (Sebi)," an Apollo Tyres spokesperson said. Sebi allows promoters to buy shares up to 5% of the paid-up capital every year.

Pantaloon Retail, India’s largest retail chain with a debt of 1,832.87 crore as on September, pledged three Future Group firms’ 21.35% stake in it to raise money to open new stores.

To be sure, pledging shares is accompanied by risk. After the slump of 2008-09, stock prices fell more than 40%, bringing the value of pledged shares below outstanding loan amounts. This forced lenders to pledge additional shares. In some cases, lenders sold these shares in the market.

Vijay Kantilal Sheth, vice-chairman and managing director of Great Offshore Ltd, an offshore oilfield services firm, became the first promoter in India to lose control over his company because of the shares he had pledged for loans.

The promoters of Orchid Chemicals and Pharmaceuticals Ltd pledged around 80% of their holding in the company with Religare Enterprises Ltd. The shares were sold to recover the money.

The amount of risk companies run by pledging shares is different for small and mid-cap firms than it is for large caps.

“The betas are far higher in case of small companies because if the market corrects, the stocks of such companies plummet, resulting in financial institutions selling these shares," said Vaibhav Agarwal, vice-president (research) at Angel Broking Ltd. “This further affects the stock price. It’s a vicious cycle. For large-cap promoters, the holding is well diversified and the ability to repay through deeper resources is higher too."

Sapna Agarwal and P.R. Sanjai contributed to this story.