Pledge-o-Mania

More than 20 companies on Monday informed the stock exchanges about shares that their promoters have pledged with lenders to raise money, a day before the Tuesday deadline set by market regulator Sebi. Companies like Jaiprakash Hydro-Power, India Cements, Godrej Consumers and Religare Enterprises disclosed details on pledged shares, bringing the total to more than 100.

The promoters of India Cements have pledged shares representing a 22.43% stake in the company, while Jaiprakash group has offered a 60% stake in Jaiprakash Hydro as security. In case of Religare, the number of shares pledged was a relatively trivial 0.58%.

Tata Sons, the main investment firm of the Tata group, has pledged a 13.19% stake in Tata Steel, 14.59% holding in Tata Power and 7.6% in Tata Teleservices (Maharashtra), according to information shared with exchanges on Monday.
Other Tata group firms such as Tata Power and Tata Teleservices have pledged 4.37% and a 37.65% stakes, respectively, in Tata Teleservices (Maharashtra) — the listed entity.

However, other details on pledges such as the timing of the loan, amount raised, end-use of the fund and identity of lenders have not been disclosed by the companies. At present, such disclosures are not mandatory.

Sebi has recently asked promoters of listed companies to disclose pledging of shares as security against loans availed of by them.

The market regulator’s order came in the wake of offloading of shares by lenders in some companies, including fraud-hit Satyam. Although the companies will now have to come out with such disclosures periodically, they are supposed to disclose the previous pledges by Tuesday this week.

Last week, some of big domestic business houses as well as MNCs like Asian Paints, Zuari Industries, Huber of Germany, Aban Offshore, Dr Reddy’s Lab, Godrej Consumer Products, Great Offshore and JB Chemicals and United Spirits have spelt out the details of pledged shares. United Spirits has said that the pledged shares represent a second-level of collateral for funds raised.

Industry experts said the promoters have been pledging their shares to raise funds for several reasons, ranging from financing creeping acquisitions to foreign buyouts.

While pledging of shares has been an age-old method of raising money, the trend deepened since 2001 when a downturn in commodities impacted the financing capacity of many Indian firms. In loan against shares, lenders charge a minimum margin of 200-250%, meaning that a Rs 100 crore would require a pledge of securities worth Rs 200-250 crore.

Interestingly, some of the companies such as ABG Shipyard and Gail have been proactive in informing stock exchanges that their promoters had not pledged any share.