A study by CRISIL Research reveals that promoters of 31 per cent of the 1,214 listed companies with market capitalisation of Rs1 billion or more have pledged a portion of their shareholding.
The total pledge works out to Rs1.1 trillion worth of market capitalisation as on 18 November. In the backdrop of inadequate disclosure levels on share pledging, investment in such companies exposes an investor to severe price volatility in case a promoter is not able to meet payments or provide additional collaterals in a falling market, warns CRISIL.
Since the value of these collaterals (pledged portion of promoter shareholding) is linked to the daily stock price, the fall in stock price below a threshold level leads to a margin call requiring the promoters to pledge additional shares to make up for the erosion in value. In case they don't, lenders cover the losses by actively selling the pledged shares in the market, leading to further price fall.
''In 2011, the capital markets have been highly volatile due to looming concerns of high domestic inflation, rising interest rates and tepid global economic environment,'' remarks Mukesh Agarwal, senior director, CRISIL Research. ''These concerns have triggered a fall in the stock prices creating pressure on the promoters who have pledged shares to make good the loss in the value of the collateral.''
Investors, especially retail investors, are generally oblivious of such details, and eventually incur losses because of sharp fall in prices, he adds.
CRISIL Research's analysis also reveals that of the listed companies which have reported pledging, in 183 companies, 25 per cent or more of promoter holding is pledged; this includes 107 companies with 50 per cent or more of promoter's holding being pledged.