When the going is good

The bulls are making the most of their free run on the Street but it doesn’t seem to have impacted pledged holdings. Indeed, as many as 60 companies from the BSE 500 universe have increased their pledges in the past two quarters. In value terms, pledged holdings increased from ₹1.28 lakh crore to ₹1.78 lakh crore, primarily spurred by the sentiment-driven rally what with the Sensex gaining almost 25% over the past two quarters. Overall, pledged holdings as percentage of the overall market cap has increased to 2.03% as on date from 2.02% in December 2013. Incidentally, pledged holdings, as percentage of total market-cap, was the highest at 2.6% in the June 2009 quarter when the markets regulator made it mandatory for promoters to disclose their pledged holdings in the wake of the Satyam scandal.

Among BSE 500 companies, 29 companies have notched up their pledged promoter holding by more than 5% in the past two quarters. Around 140 companies have some portion of their promoter holding pledged, while 41 companies have more than 50% of their promoter holding pledged as on June 30, 2014. The companies that have significantly hiked their pledged holding over the past two quarters include Adani Power, Indiabulls Power, Punj Lloyd, Reliance Power, Bilt and Apollo Hospitals. The Tata Group’s overall pledged holding has also increased from 1.56% to 2.07% over the past six months. 

So, why are blue-chip stocks such as Tata pledging additional shares in a buoyant market environment? Usually, promoter pledging is the last resort for companies to raise money after they’ve run out of easy money sources. The reasons for pledging vary from company to company, say analysts. The prospect of an economic climate conducive to investment brought about by the change in political leadership is encouraging some cash-strapped companies, especially in the infrastructure and power sectors, to pledge shares to fund their expansion plans. Some of them are cashing in on the rise in share prices by pledging more shares. 

One way or the other

Pledging continues to remain a popular funding mechanism for promoters of highly leveraged infra companies

A sector-wise analysis indicates that capex-heavy sectors like real estate, infrastructure and power are the big pledgers. Consumer discretionary (18%), industrial (17.5%), and energy sector (16.7%) companies, many of which are facing a liquidity crunch, contribute the highest quantum of promoter pledges in terms of percentage of total pledged equity in the market.

“Since pledging shares is the fastest way to raise capital, most promoters do this in order to raise bridge funding for company operations,” says Ambareesh Baliga, managing partner, Global Wealth Management, Edelweiss Financial Services. Adds UR Bhat, managing director of Dalton Capital: “My guess is that these are aggressive, ambitious people who are funding their initial payments for acquisitions and new projects by pledging their promoter holding. Until the final deal is struck, companies often find it difficult find funding from traditional sources.” Indeed, Adani Power’s recent acquisition of Lanco’s Udupi power plant, the biggest in the thermal space, indicates this.  

Analysts warn that pledging does not necessarily portend doom. “Pledges are not always a sign that something is wrong with the company,” says Yogesh Radke head of quantitative research, Edelweiss. “Often, promoters pledge holdings for daily capital needs and operational work.” 

 The flip side

While overall pledging has gone up over the past two quarters, it has also decreased in the short-term, falling from 2.08% in March 2014 to 2.03% in June 2014, with 65 companies in the BSE 500 universe redeeming pledges in the past six months. “One of the reasons some promoters are revoking their pledges is that markets have improved because of which the extra margin requirement for borrowers will have come off. Another reason is that because people are able to raise money more easily, it is possible for promoters to redeem their pledges,” says Baliga. Indeed, an increasing number of companies are raising money through Qualified Institutional Placements. According to Prime Database, over ₹18,000 crore  has been raised through QIPs since the beginning of the fiscal.

While everything is hunky-dory right now, a market correction would mean bad news for promoters who have pledged most of their holding and could possibly see some of their holdings being sold off by lenders. To curb the volatility in the market due to sale of pledged shares, the RBI has stipulated that NBFCs with an asset size of above ₹100 crore have to maintain a loan-to-value (LTV) ratio of 50%. Also, these NBFCs can only accept Group-1 shares as collateral while giving loans above ₹5 lakh and report the same to the exchanges. At present, some NBFCs are giving loans at an LTV ratio of 65-70%. 

“It’s a necessary risk-containing measure, but it’ll have an impact on the number of stocks on which margin funding was given. Quite a few Group 1 stocks are in the F&O segment. The real funding requirement was for the other stocks,” sums up Baliga.