Opinion | Promoters should be wary of pawning shares1 min read . Updated: 16 Dec 2019, 04:17 PM IST
It is only fitting that banks, mutual funds, insurance companies, pension fund managers and companies themselves are being warned of the perils of the practice.
Promoters of Indian companies have bought back pledged shares worth almost ₹1 trillion this year. The trend is no surprise, given what has been going on. Bankruptcy cases have gained momentum, lenders have turned cautious, and the stock market regulator has sought greater disclosure from firms with a high concentration of encumbered stock. Oversight is tightening overall, with regulators of banking, insurance, pensions and securities drawing up rules to plug gaps that allowed money raised by pledging shares to be routed back to companies. There had also been worries about stock price manipulation. The broad effort is to restrict business owners from overleveraging their companies’ equity to raise debt. The leeway for business owners to raise capital for new ventures comes at the cost of their wielding control over older ventures that is disproportionate to their ownership.
Typically, promoters pawn their shares in a rising market, and the rationale evaporates if stock prices start falling, which forces lenders to sell the pledged shares. This pushes the stock price down further, largely to the detriment of the small investor. The problem becomes more acute when the bulk of the shares pledged by Indian business owners do not meet the central bank’s collateral norms.
It is only fitting that banks, mutual funds, insurance companies, pension fund managers and companies themselves are being warned of the perils of the practice. The message appears to be getting through. The number of companies with promoter share pledges worth ₹3.11 trillion was 906 in January. This has come down to ₹2.24 trillion for 838 companies now.