Hypothecation of shares by promoters have reached all-time highs. According to a Crisil report close to one-third of 1,214 listed companies having market capitalisation in excess of Rs 100 crore,have some portion of their promoters shares pledged. While the pledged shares in these cases amount to Rs 1,10,000 crore (as on November 18,2011) the Crisil report argues that disclosures other than just the percentage of shares pledged should be made available to retail investors for them to take informed decisions. Promoters pledge their shares as collateral to raise funds from banks or finance companies. While 183 companies in the list have more than 25 per cent of their promoters holding pledged,the report says that there are 38 companies where the promoters have pledged more than 80 per cent of their holding in the company. That includes names like beleaguered Kingfisher Airlines (90.2 per cent of promoters holding pledged),United Spirits (89.6 per cent pledged),Spicejet (86.2 per cent pledged) and Essar Oil (84 per cent pledged). There are three companies where the entire holding of the promoter is pledged: Gujarat Pipavav Port,Tata Coffee and Vikas WSP Limited. Industry sectors such as power generation,IT and ITeS,infrastructure,pharma and healthcare companies have higher levels of pledging. While promoters pledge their shares,a falling market environment would erode the value of the collateral and the lender would ask for additional shares to cover the decline in value. If promoters do not,lenders cover the losses by selling the pledged shares in the market. The report cautions that retail investors are unaware of finer details of pledging such as purpose of funds raised through pledging,price at which initial pledging is made and price and conditions that will trigger the margin call and that can go against them. In 2011,the capital markets have been highly volatile. Various domestic and global concerns have triggered a fall in stock prices creating pressure on the promoters who have pledged shares to make good the loss in the value of the collateral. Retail investors,are generally oblivious of such details,and eventually incur losses because of sharp fall in prices, said,Mukesh Agarwal,senior director,Crisil Research. Critical information on promoter share pledging should be made available on a quarterly basis to for greater transparency, said Tarun Bhatia,director,capital markets at Crisil.
