Investors jittery about Yes Bank’s high holding of pledged shares

Mumbai: Yes Bank Ltd’s surging stock of pledged promoter shares has left investors anxious, as defaults and frauds at some of its largest borrowers have driven the lender’s shares to multi-year lows.

On Thursday, Yes Bank shares plummeted as much as 14% before closing 8.21% lower at ₹56.30, a five-year low. The culprit, yet again, is the large promoter pledge of CG Power and Industrial Solutions Ltd shares which, after invoking, have saddled Yes Bank with a nearly 13% ownership in the power equipment maker. Since the news surfaced on Tuesday about suspect transactions at CG Power, the lender’s shares have shed 26.6%.

“There is continuous concern on the (Yes Bank) stock about its capital requirements and its stressed assets. The stock may see a recovery only if there is debt resolution in recoveries from some large accounts,” said an analyst, who did not want to be identified.

Yes Bank, which held pledged shares from just one company at the beginning of 2014, saw the value of such shares build up to ₹9,336.16 crore across 21 companies as on 19 August, showed data from NSE Infobase, a corporate data tracker.

Reliance Capital, Reliance Communications, Reliance Home Finance, Sun TV Network and Zee Entertainment are some of the NSE-500 companies in which promoters have pledged shares with Yes Bank since 2014, the data showed.

On Tuesday, CG Power wrote to stock exchanges that it has discovered several suspect transactions, which significantly understated the company’s previously reported liabilities and related-party transactions. In the two days since, its shares have fallen 42%.

Investors are now worried that similar issues may surface again at Yes Bank, given its record of aggressive lending against shares that has now made it a significant minority shareholder in several defaulting companies. These companies belong to a range of sectors—from power to non-bank lenders and pharmaceuticals.

Following defaults, the bank has actively invoked pledged shares over the past few months. While shares held as collateral could act as a cushion for lenders when borrowers default, it becomes less effective when these shares decline.

On 26 July, Yes Bank told the stock exchanges that it has acquired an 18.55% stake in Cox and Kings Ltd by invoking pledged shares. On 4 July, it said it had picked up a 9.47% stake in Eveready Industries Ltd. It also invoked almost 90 million pledged shares of Reliance Power in June.

To be sure, promoters pledging shares with banks as collateral for loans is a common practice in India. According to a Kotak Institutional Equities analysis of pledged holdings of BSE-500 stocks, the percentage of pledged promoter (majority shareholder) holdings by value has come down in the June quarter in comparison to the preceding three months.

The percentage of pledged promoter holdings declined to 2.47% of total promoter holdings in the June quarter, compared with 2.83% in the March quarter. Outstanding promoter pledged shares were ₹1.73 trillion, which is about 1.21% of the total BSE-500 Index’s market capitalization at the end of June.

The brokerage noted that pledging shares does not necessarily imply that a company or a promoter is under financial stress; lenders could have sought additional security in the form of promoter shares too.

Other lenders including state-run banks have converted debt into equity using the Reserve Bank of India’s strategic debt restructuring rules and now own stakes in these companies. For instance, ICICI Bank, Axis Bank, Oriental Bank of Commerce and DBS Bank, among others, together own 25.81% of Ballarpur Industries Ltd. Both Ballarpur Industries and CG Power are part of the Gautam Thapar-controlled Avantha Group.

An email sent to Yes Bank seeking comments remained unanswered till press time.

Earlier this month, markets regulator Securities and Exchange Board of India (Sebi) tightened the norms for pledging of shares by promoters of listed companies.

In its circular, Sebi directed every listed firm to disclose detailed reasons for pledging of shares by its promoters, along with the amount of stake pledged, within two days if the total amount of shares pledged by the promoter or the promoter group crosses 50% of the total stake held by the promoter or if it is over 20% of the firm’s total share capital. Earlier, a listed firm had to disclose about share pledges by its promoters within seven days of such an action.