Pledging of promoter shares touched its peak in January last year, when promoters of 906 companies pledged shares worth ₹3.11 trillion. The figure has since fallen to ₹2.24 trillion for 838 companies as of Friday, according to a Mint analysis of data provided exclusively by BSE Ltd.
Wary that they might have to cede control of their companies, promoters are expediting efforts to strengthen their hold on the companies they founded by reducing pledged shares even as the move strengthens their ability to raise funds in case of a crisis. Founders of Essar Steel Ltd and Jet Airways (India) Ltd are among those who have lost control of their companies in the past year.
“While working capital loans are a rolling facility and project financing is long term, loans against shares are given typically for a 1-3 year period. We’re now seeing an organic unwinding of these loans and they are not getting replaced by new products," said Prateek Jhawar, director of head of infrastructure and real assets at Avendus Capital. “This organic unwinding that is happening now is a good trend."
Over the past year, promoters of at least 232 Indian companies reduced the number of shares they had pledged, the Mint analysis shows. Promoter stakes of 821 firms worth ₹2.34 trillion were pledged as on 14 December 2018; of these, promoters of 232 firms have brought down their pledges from ₹1.27 trillion on 14 December 2018 to ₹87,123 crore now.
Out of the 906 firms whose promoters had their shares pledged in January last year, 817 are still listed, while the rest are either delisted or suspended or merged with other firms.
“In any business, the first level of debt they take on is an operating company loan, then a subordinate loan, then a holding company loan. The promoter pledges his shares to finance last-mile equity," Jhawar said. “Now, we’re seeing a supply-side crunch among those who used to provide this capital to promoters, be it NBFCs or debt mutual funds. They saw a lot of liquidity coming their way in 2016, which allowed this kind of corporate lending, but now, the lenders are asking for their money back."
Over the past year, companies that saw the maximum reduction in promoter pledges in terms of number of shares include GTL Infrastructure Ltd, Uttam Value Steels Ltd, Reliance Power Ltd, Tata Teleservices (Maharashtra) Ltd, Reliance Communications Ltd, Suzlon Energy Ltd, GMR Infrastructure Ltd, CG Power and Industrial Solutions Ltd, Unitech Ltd, Sterlite Technologies Ltd, Adani Ports and Special Economic Zone Ltd, Adani Transmission Ltd, Adani Power Ltd and Punj Lloyd Ltd.
Of the 232 firms cited above, companies that saw the highest reduction in promoter pledges in terms of value include Sterlite Technologies, Zee Entertainment Enterprises Ltd, Reliance Power, Adani Ports and Special Economic Zone, Reliance Infrastructure, Coffee Day Enterprises Ltd, Indiabulls Housing Finance Ltd, Future Consumer Ltd, United Breweries Ltd, Bajaj Corp. Ltd, CG Power and Industrial Solutions, Jubilant FoodWorks Ltd, Cox and Kings Ltd, Mahindra and Mahindra Ltd, Reliance Communications and Edelweiss Financial Services Ltd.
These companies have seen a ₹34,000 crore reduction in promoter pledges.
Repayment defaults and liquidity crunch in some companies have triggered either the process of liquidation or lenders have converted debt into equity and taken over the company or have invoked pledges and sold them. Due to these reasons, the value of pledged holdings (in terms of shares) has gone down in some firms. For instance, in CG Power, KKR has enforced its pledge and initiated a management change, and in Suzlon, lenders are seeking buyers for a debt resolution.
Reliance Power and Reliance Communications’ promoter, Reliance Infrastructure, has repaid part of its debt and partly released pledged holdings ; Vedanta group, the promoters of Sterlite Technologies, has also repaid part of its debt; promoters of Edelweiss Financial Services Ltd have repaid part of the debts to reduce pledges.
“There have been instances where due to sale of shares the pledged value has come down," the head of corporate finance at a large consulting firm said on condition of anonymity. “But taking a lesson from such companies, promoters of hundreds of other firms are now more cautious in pledging too much stake. Promoters also fear that lenders, panicking at the overall credit crisis situation in the market, may invoke pledges and sell the shares to another entity to recover dues."