Cash-rich promoters unlock share pledges

Earlier this month, Hero Investments Pvt Ltd, the promoter group firm of the country's largest two-wheeler maker, Hero Honda, revoked 33 million shares, worth Rs 6,180 crore (Rs 61.8 billion).

These were 17.33 per cent of the total shares and pledged with three different lenders.

Hero is not alone.

Cash-rich promoter entities of quite a few blue-chip companies such as Tata Motors, Tata Consultancy Services and Tata Chemicals have done the same this month.

Joining them are Kalanithi Maran of Sun TV and promoter entities of Bombay Dyeing and EIH.

According to data compiled by the Business Standard Research Bureau, the value of pledged shares released in June is more than double the combined figure of the previous two months. 

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While in April and May, pledged shares worth Rs 2,036 crore (Rs 20.36 billion) and Rs 2,819 crore (Rs 28.19 billion), respectively, were released, the amount has already crossed Rs 13,000 crore (Rs 130 billion) in June.

According to a report by Fairwealth Securities, promoters of at least 782 listed companies have pledged shares worth a massive Rs 1,53,000 crore (Rs 1,530 billion) to raise cash for various activities, indicating the absence of a vibrant corporate bond market in the country.

Some companies are unwilling to use the word 'revoke'. Hero Honda chief financial officer Ravi Sud said, "Revoking has negative connotations.

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"I would rather say release. As a matter of principle, when you pledge shares, you are under a potential risk.

"In the last few months, the overall sentiment has been bearish. So, it's always better to get shares released when you have cash."

Analysts say some of this could be because of the stigma surrounding stocks of companies whose promoters have pledged shares. Girish Nadkarni, executive director, Avendus Capital, said some cash-rich promoters could be revoking pledged shares to ward off negative sentiments.

"However, for most small companies, liquidity is still tight. It (debt) is so expensive that companies are looking to keep as little debt as possible."

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"The market is not differentiating between shares pledged for project finance and for promoters' personal needs.

"There is a negative sentiment surrounding such companies," said D D Sharma, vice-president, research, Anand Rathi Financial Services.

He said it was difficult to say if a share pledge had been revoked because of the sentiment.

"It could be a natural process. Whenever the liability is over, the pledge is revoked," said Sharma.

Another banker said rising interest costs could be a trigger for some promoters.

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"Most lending on shares happens in the non-banking finance company space, where rates are high.

"With rates going up further, many promoters may be looking to pay off their loans."

Such lending is dominated by NBFCs, largely due to a cap on banks' exposure to the segment.

Some companies said the step was largely in the normal course of business and did not have anything to do with the market sentiment.

"Promoters pledged shares to borrow for acquisition of shares. We had paid back most of the debt and only shares worth Rs 70 lakh (Rs 7 million) were left.

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"We have got those released too.

"It had nothing to do with the markets going up or down. I don't think we were concerned about the volatility in the markets," said SS Mukherjee, vice-chairman, EIH, which runs and manages the Oberoi properties.

"The promoters had borrowed money for around 90 days to buy out Honda from Hero Honda and in the process pledged shares with banks and other financial institutions.

"They have now paid the lenders and got the shares released," said Hero Honda's Sud.

But companies would rather get rid of the pledges.

"We have repaid our loans. The pledged shares have been released. The reasons vary, but generally speaking, there is always a risk if the number of pledged shares is high.

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"So, companies try to get their shares released at the earliest," said Durgesh Mehta, joint managing director and chief financial officer of Bombay Dyeing, a Nusli Wadia group flagship.

Brokerage-owned NBFCs such as India Infoline, IndiaBulls, Edelweiss Religare and Motilal Oswal dominate the business. Some banks also lend against shares through their NBFC arms.

According to brokers, such loans typically have tenures of between one and three years. They carry a margin of two-three times, which means the value of the shares pledged is two-three times the loan amount.

For NBFCs and banks, it's a low-risk, high-return business, as they can charge 3-4 per cent over the prime lending rate.

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While this works well in a bull market, the position of promoters becomes shaky if the market is falling.

For instance, Hyderabad-based Orchid Chemicals faced a hostile takeover attempt after lenders dumped pledged shares in the market. Promoters of Great Offshore lost control of the company after they pledged shares with rival Bharti Shipyard.

Promoters of 44 companies, including Tata Coffee, Gujarat Pipavav Port, Ansal Properties, Koutons Retail and Andhra Cements, have pledged 90-100 per cent of their holdings.

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Promoters of at least 169 companies have pledged 50-90 per cent holdings.

These include Gati, Gujarat NRE Coke, United Spirits, Wockhardt, Dunlop, Essar Oil, Bilcare, S Kumars Nation, Subex, Orchid Chemicals, Parsvnath Developers, Orbit Corporation, Indiabulls Power, Unitech, DB Realty, Suzlon Energy, NIIT and Adani Power.

Promoters of a few of these have got some of the shares released.

The issue came into focus last week after shares of two GTL group companies lost half their value in a single session.

This was followed by shares of S Kumars and Orchid Chemicals, whose promoters had pledged over 50 per cent holdings.

With contributions from Arijit Barman & Sameer Mulgaonkar