Firms with pledged shares in a spot

Promoters of companies which have pledged their shares will be in a bind following the government's mandate that all listed companies must have a minimum 25 per cent public float. Although the government yesterday indicated it was open to a review of this rule, many companies will have to re-work their funding strategy if the norms are not amended.

Promoters of companies such as JP Power Ventures, Plethico Pharma and Omaxe had pledged more than 30 per cent of their shares as on March 31, according to information with the exchanges.

There are as many as 31 companies with a promoter holding in excess of 75 per cent. All these promoters have pledged their shares to raise high cost funds. And, 21 other promoters have pledged shares in excess of 10 per cent of their equity.

"The impact of this should be seen on a case to case basis. In this case, some companies with tight funding situation would be impacted more. There are others who would be able to manage this smoothly," said Saurabh Agarwal, managing director and head of investment banking with Bank of America Merrill Lynch.

Companies such as Fortis Healthcare, which is reported to have pledged 51 per cent of its promoter holdings, will need to dilute only 1.47 per cent of its equity. It is anyway planning to raise equity. 

"Companies with high pledged amount and a high promoter shareholding would be vulnerable," said an investment banker with a leading bank.  Many of the companies are in the real estate and infrastructure space and these would not see cash flow happening fast to repay the borrowings. So, the equity dilution or stake sale would be required to be timed well.

A fall in the secondary market would create immense pressure, he added. A falling market would lower the value of the pledged shares and require promoters to pay up the difference.  Banks typically lend 50 to 60 per cent of the pledged amount and maintain that margin.

Sanjay Sakhuja, CEO of Ambit Capital Corporate Finance said the impact would not be felt market-wide and reckoned that pledging and increasing public holding should be seen in a different light. Moreover, the government has allowed companies not meeting the 25 per cent public float norm to dilute their equity stake 5 per cent annually. This would mean the companies would have to tread the stake dilution carefully.

According to Credit Suisse, companies seeking to raise their public holdings may see their shares carrying a "valuation discount," while those planning to sell stock in stages could face the risk of low demand in initial offerings.

It was in February 2009 that the Securities and Exchange Board of India made it mandatory to disclose shares pledged by the promoters on a quarterly basis.

Several companies resorted to raising funds by this route to tide over the tight liquidity situation. The aim was to increase transparency.

The number of companies which disclosed these numbers went up to 754 in the quarter ended March 2009. By March 2010, 137 promoters had revoked their pledges, while 115 joined the pledging list.