Pledging Of Shares Falls To An All-Time Low. Here's Why

The shares pledged by promoters of companies listed on the National Stock Exchange (NSE) hit an all-time low, data provided by the Prime Group showed.

Promoter pledging has hit 8.99 per cent (in terms of percentage of total promoter holding), which has been the lowest promoter pledging level in years.

Promoters often borrow against shares by pledging them to non-banking financial companies (NBFCs), and availing loans. These loans can be of a personal nature, or be used to fund the company’s growth in some cases.

Often, promoters pledge shares to fund other ventures as well. For instance, the promoters of the Essel Group had pledged shares to fund their infrastructure business.

The infrastructure business did not generate enough cash flows to cover financing costs, and ultimately lenders sold off shares to recover their money.

The action increased the supply of shares in the market, while reducing promoter stake in the business. The reduction in promoter stake could bring in instability in the leadership.

Hence, investors often frown upon promoters who pledge a high percentage of their holding. Nevertheless, in some cases, the money is routed to the publicly listed company to help tide over any working capital or other financial issues.

However, today, stock prices have risen at a rapid pace, allowing promoters to pledge a lower number of shares to avail the loans. In addition, profits have grown in several business segments, as they have benefitted from pent-up demand.

The disruption of the informal sector, and the capture of a larger part of the segment by the formal sector has allowed some companies to do well. Hence, with larger dividend pay-outs and pay raises, companies have been able to gain back market share.

Certain companies, such as Vedanta and Max Financial Services, that are included in Nifty 200, have the highest pledge of 100 per cent and 64 per cent, respectively.

Some other companies in the same index saw an increase in pledging as well. These include JSW Energy, JSW Steel, Jindal Steel, Max Financial Services and others.

Among the 200 companies in the index, six saw promoter holding decline in January. Of these six companies, three belonged to the Adani Group. The group had announced plans to reduce pledge across businesses such as Adani Green, Adani Ports, Adani Transmission, and Adani Gas.

A significant part of the total promoter holding had been pledged to financial institutions as the promoters raised funds. The plan to release shares from pledge was seen as a positive by analysts, when it was first announced in February 2020.

De-pledging remains a positive for investors, and if the markets continue going up, pledging is likely to come down.