Tuesday, April 23, 2024
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HomeInvestmentA Deep Dive Into Share Pledges In The Stock Market

A Deep Dive Into Share Pledges In The Stock Market

The promoter is always the key figure when we perform a shareholding pattern analysis of any company listed on the stock market. There is no set benchmark to confirm whether the holding is sufficient or not, but it is certain that the higher the promoter’s holding, the better it is. It instills more confidence when compared to a company whose promoter holding is very low.

Have you ever heard that XYZ company’s promoters have pledged their shares, whatever the reason maybe? If not, then this article is for you.

Promoters are the major shareholders of any company and are responsible for managing its day-to-day operations. When they require funds for various purposes, such as mergers, acquisitions, CAPEX, and more, they may pledge some or all their shares to lenders. This means that these shares are used as collateral with banks in exchange for loans.

know: CapEx vs OpEx

So, why should we be concerned about this? Well, if the number of pledged shares keeps increasing from one quarter to the next year or year after year, it sends a concerning signal about the company’s liquidity conditions and casts a shadow over its overall financial well-being. Conversely, if the situation is the opposite, it is seen as a positive sign.

In this context, if any micro or macroeconomic factors affecting the company or the economy change, the pledged shares would be the first to be used by the lenders as collateral. This often results in a decline in the share price. As a result, many investors prefer to avoid companies with a high proportion of pledged shares, and analysts also tend to steer clear of such firms.

An increasing pledge signifies that the promoters are continuously offering their shares as collateral. This suggests a deepening financial fragility within the company, making it increasingly challenging for the promoter to withdraw the pledge even after some time. Conversely, a decreasing pledge serves as an indicator of the company’s financial strength and overall well-being. It provides insights into the company’s effective operational performance.

Moreover, we can classify promoter pledges into distinct categories. Let’s define these categories:

  1. Zero Pledge: In this category, none of the promoter’s shares are pledged as collateral.
  2. Low Pledge: This category applies to companies where the promoter’s pledged holding falls within the range of 0-20%.
  3. Moderate Pledge: This category encompasses companies where the promoter’s pledged holding ranges from 20% to 40%.
  4. High Pledge: Companies falling under this category have their promoter’s pledged holding exceeding 40%.

This categorization not only aids in eliminating stocks with high promoter pledges but also in monitoring changes in the pledge percentage. For instance, if ABC Limited had a 10% promoter pledge in the June quarter, it would fall under the ‘Low pledge’ category based on our classification. If, in the next quarter, the company reduces the pledge percentage to zero, it can serve as a positive signal, prompting further research on the company for making an informed investment decision.

Companies with high promoter pledge (Market Cap over 50,000 crore)

Company Name CMP Rs M Cap Rs in Cr 1Yr return % Promoter Holding % Pledged %
Ambuja Cements 421.85 83,764.42 -19.78 63.15 100.00
Vedanta 216.20 80,366.00 -24.24 63.71 99.99
Hindustan Zinc 293.35 1,23,949.74 4.34 64.92 99.37
IndusInd Bank 1,460.00 1,13,449.98 25.66 15.83 47.30
Adani Power 352.75 1,36,053.53 6.26 70.02 16.24

Companies with very low promoter pledges (Market Cap over 50,000 crores)

Company Name CMP Rs M Cap Rs in Cr 1Yr return % Promoter Holding % Pledged % 
Bajaj Auto 5,337.25 1,51,021.51 46.39 54.98 0.01
Bajaj Finserv 1,553.55 2,47,867.21 -5.26 60.69 0.01
Tube Investments 3,035.05 58,673.22 14.81 46.12 0.01
Varun Beverages 919.95 1,19,514.03 77.19 63.09 0.04
M & M 1,496.80 1,86,131.33 15.18 19.33 0.06

 

Understanding shareholding pledges and avoiding companies with high pledges is crucial to protect your investments. Investors must take care of these parameters before making an investment decision.

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