PLEDGED SHARES PUMMEL MARKET AGAIN

By Ruma Dubey

Take a look at the stocks which figure out in the big losers of the day  - Tulip Tele, Era Infra, Goldyne Tech, Parsvnath Devlopers, Radico Khaitan, Pipavav Defence, SRS, Nitin Fire, Pradip Overseas. And all these stocks have one thing in common – promoters have pledged large chunks of their stake.

The biggest loser – Tulip Tele, promoters stake is at 70.08% of which 46.01% is pledged. The stock hit a new low today at Rs.65.65.  Era Infra, promoters hold 59.99% of which 79.07% sake in pledged. This stock hit a new low today at Rs.114.90. Goldyne Tech did not hit a new low but it was frozen at the 20% lower circuit at Rs.273.60 and here too, of the promoter stake of 57.32%, it has pledged 83.99% stake. Parsvnath Developers also hit a 20% lower circuit at Rs.46.25 and of its promoters stake of 71.68%, it has pledged 87.19% stake. Next in line, Sumeet Industries, has pledged 60.64% of its 44,42% stake and the stock hit a new 52-week low at Rs.15.55 and it was also frozen at the lower circuit of 20%. A hot favourite of marketmen, Pipavav Defence too was frozen today at the 205 lower circuit at Rs.62.15 and its promoters have pledged 87.19%  of its 71.68% stake.

As per data from CMIE, over 60 companies saw their promoters pledging over 50% of their holdings by the end of FY12. In all, promoters of 30 companies, which comprise largely infrastructure and realty firms, have over 70% of their holdings with creditors. And as per a study conducted by CRISIL, promoters of 31% of the 1,214 listed companies, with market capitalisation of Rs.100 crore or more, have pledged a portion of their shareholding. The report states that there are 183 listed companies where 25% or more promoter holding is pledged. This includes 107 companies where promoters have pledged 50% or more and 14 such companies where promoters have pledged 90% or more of their holding.

Why this sudden news about pledged shares? The worry is that in companies where promoters have pledged more than 25% of their shares, there is a possibility that given the low prices, the promoters might opt to sell out. Traders say that there is a bear cartel too at work. How this works is that by floating negative news, they hammer down the future prices, which in turn naturally, gets down the stock prices too. And when stock prices crash, promoters with pledged shares could get margin calls from the lenders with whom they have pledged shares.  Pushed into the corner, promoters have only two options – either repay a part of the loan or get more collateral by pledging more shares.  If they do either, they manage to save the day. But when they are not able to do either, the lender is then forced to dump the shares. This brings down the stock price further. And this is precisely what the bear cartel wants – they will go home with a neat pile of profits.

Rumours seemingly emerged out of nowhere and the stock prices got mangled to pulp, only to recover after the management issues a clarification.  We had witnessed a similar scene last year in June and then again in November. And based on the past experience, one cannot help but wonder if this is not a bear cartel at work. But it is just not the cartel. We need to give credence to this issue of pledged shares and see if there is indeed a risk of lenders selling off. With rising interest rates, the pressure has mounted on the promoters and on the NBFCs.  NBFCs typically fund high risk but at a high interest rate.  There is worry that many promoters might not have the money to pay back the borrowed money and NBFCs might begin to sell off as their cost of funding too has gone up.

So should one take this opportunity to buy stocks of these pledged shares as they hit new lows? There is no simple “yes” or “no” answer to this. Just as not everyone with the name of Ramalinga Raju is a thief, not every company which has pledged shares is bad. There are a few factors which should help you decide.

First and foremost is the size of the company. The bigger the company, the lesser are the chances of the company defaulting on paying the margin money. It is not just the size of the company but also the underlying fundamentals; nothing can be above fundamentals. And by this logic, mid cap and small cap stocks are higher risk. Promoters of many such small companies pledge shares in plenty to raise money but their chances of reneging on their commitment, in terms of paying up margin call money is higher. Pay attention to the percentage of shares pledged. Higher the stake of pledged shares, higher is the risk and vice versa. 

Catching falling knives is always dangerous; so assess before buying into these highly leveraged stocks.