An analysis by Edelweiss Alternative Research showed that shares worth around Rs 2 trillion, about 1.3 percent of the total market capitalisation of the firms, was pledged by promoters of these companies in the July-September quarter. The analysis is based on data of 4,062 companies and found that 16 percent or 642 promoters pledged a part of their holdings.
What is Promoter Pledging?
A promoter of the company is generally an individual or a firm that formed the company and held a majority stake in the company before it went public. Promoters are also known to be the group of majority shareholders that are responsible to run the day-to-day affairs of the company.
The promoter can use the stake he/she/they own as collateral to borrow money for company affairs, personal use or other business ventures. This is known as pledging of shares by a promoter or promoter pledging.
Like any collateral, banks or financial institutions, that these shares are pledged with, have the right to sell the assets to recover the amount that the borrower has failed to repay.
Promoter pledging is a common practice and it does not raise red flags when the percentage of shares pledged is small.
However, when you are looking to invest in a company for the long term, you should know that a high percentage of promoter pledging can cause high volatility in the share price of the company. Moreover, this will mean the failure of the company's management to meet its debt obligations, which is always a red flag as it will affect the company's ability to sustain profits.
It is often advised to avoid stocks where promoter pledging is higher than 15%.
12 companies that saw the biggest rise in promoter pledging in July-September:
Edelweiss Alternative Research has highlighted the companies that saw the biggest rise in promoter pledging in the September-ended quarter when compared to a year ago.
|Name of the company||Promoter Pledging % In Q2||Promoter Pledging % In Q1||% increase|
|The Ramco Cement||11.49||1.97||9.53|
|Bliss GVS Pharma||0.33||0||0.33|
*Adani Group pledges as on 2 November 2020.
On the other hand, the company's that saw the biggest fall in promoter pledging during the quarter included Torrent Power, Eveready Industries, Laurus Lab, Va Tech Wabag, Strides Pharma, JSW Steel, and Jyothy Labs.
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