NSE, BSE step up scrutiny of stocks with higher pledging
- Stocks with promoter pledging of over 25% of equity capital to attract 35% margin levy
- The move is part of surveillance measures by bourses and Sebi to reduce volatility
Trading in certain categories of stocks is set to become more expensive after BSE and NSE on Friday announced fresh surveillance measures to reduce volatility in stocks having high promoter pledges.
The bourses announced a minimum margin levy of 35% on stocks where promoters have pledged their stake by more than 25% of the total equity capital and have a market capitalization of over ₹1,000 crore.
The move is part of additional surveillance measures being put in place by the exchanges and market regulator Securities and Exchange Board of India (Sebi) in order to reduce volatility.
The new measures will be implemented from 1 November, the exchanges said.
The higher margins will also apply to cases where the concentration of the top 25 clients in trading during the last 30 days is 30%, or more, and if the price variation between high and low of a scrip is greater than 40% in the last three months.
The surveillance measures mean investors trading in these securities will have to shell out higher margins, thereby making trading in the scrips expensive.
“The surveillance measure is to ensure market safety and safeguard interest of investors,” said NSE in a circular.
A total of 839 listed companies have pledged shares worth ₹2.28 trillion. Around half of the total value of pledges, worth ₹1.05 trillion, comes from just 25 companies.These companies include Future Retail Ltd, Adani Transmission Ltd and Emami Ltd.
This is part of a series of steps taken by the regulator to crack down on pledged shares and promoter-side deals against those shares.
Of late, companies with a higher proportion of pledged shares have experienced higher degree of price volatility.
On 28 June, the regulator widened the definition of encumbrance or share pledging. The definition now includes any restrictions on free and marketable shares of promoters which affect the tradeability of shares.
It will also include lien, negative lien, pledge and non-disposable undertakings (NDU).
These measures assume importance following the recent spotlight on mutual funds’ exposure to loan-against-share schemes. These involve debt mutual funds investing in papers of little-known companies on the backing of promoter shares.
The loan-against-share schemes faced criticism following a collective decision by fund managers to not sell shares of the Essel Group.
Other instances include promoters pledging their shares to take debt in unlisted companies to fund other businesses, which increases the leverage of the entire group.
But the overall debt position of promoters, or promoter’s unlisted entities, is not available to minority investors.
Another such means is the use of so-called structured obligations. Promoters create a special purpose vehicle with their shares committed to it, without telling minority investors of the purpose or end-use of the special purpose vehicle.
Share prices of non-banking financial companies (NBFCs) with higher ratio of promoter share pledges have corrected sharply and witnessed higher volatility due to the sector facing liquidity crunch.
Mutual funds have an exposure of about ₹50,000 crore to such structures, wherein they have lent to little-known companies on share pledges of stronger promoters.
Besides, from 1 October, NBFCs will not be allowed to ask company promoters to transfer shares to their accounts as collateral. Earlier, NBFCs would allow promoters to pledge shares in their favour, or transfer shares to their account or obtain a power of attorney on the demat account of the borrower.
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