Pledging pains | Value Research Investors should avoid the companies in which a large stake of promoters is pledged, for such companies can run into trouble any time

Pledging pains

Investors should avoid the companies in which a large stake of promoters is pledged, for such companies can run into trouble any time

Promoters pledge their shares as collateral to borrow money. All Indian listed companies are required to disclose the data of promoter pledging. Investors must find out the amount of shares pledged before investing in a company. Companies in which a sizeable portions of promoters' stakes are pledged should be avoided.

More specifically, pledging in itself is not unhealthy; what matters is what the money raised through pledging is used for. Promoters frequently pledge their holdings to inject liquidity in their companies or for other business reasons. However, pledging of a large part of promoters' holdings might reflect distress in a company.

Pledging of large stakes can even lead to the promoter losing control over the company. If a promoter has pledged his stake with a bank and the stock price decreases, the value of the shares pledged also declines. Thus, promoters might need to pledge more shares to match the amount of the loan. If the promoters are not able to pay the loan back, the bank can sell the pledged shares in the open market. This could even lead to promoters losing their control over the company and hammering of the stock price.

A smart investor is one who knows where to invest. And a street-smart investor is one who also understands where not to invest. We hereby provide a list of stocks which bear a 'CAUTION' label on them. The list comprises those companies whose number of shares pledged has grown over last year. Investors would be better off staying away from these companies.

High on promoter pledging

Company nameTotal pledge shares (%)
Latest     Previous year 
Quarterly EPS (₹)
Latest      Previous year
20 Microns31.5219.81-1.56-0.32
Bharati Shipyard65.4828.48-107.42-58.24
Birla Precision Technologies36.351.08-0.25-0.03
Dharani Sugars & Chemicals37.5427.2-4.053.2
Flexituff International24.29.4924.07
GMR Infrastructure57.8442.76-2.053.01
IL&FS Transportation Networks69.4954.722.094.56
Khaitan Chemicals & Fertilizers31.240.820.260.96
Picturehouse Media29.9616.560.22.03
Sanghvi Forging & Engineering38.7210.07-1.24-0.53
Shalimar Wires Industries73.997.510.30.73
Shyam Telecom28.398.87-28.51.2
Steel Exchange India47.1119.810.194.45
Supreme Infrastructure38.9123.89-0.1213.11
Venus Remedies32.618.18-18.0612.33
Vijay Textiles45.829.97-8.261.31

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