Until early last year, it looked like India's stock market would continue its gravity-defying rise forever.

The Bombay Stock Exchange's Sensex index in January 2008 climbed to highs approaching 21,000 points, capping five years of almost uninterrupted gains.

Many controlling shareholders in the country's listed companies, hungry for capital to buy land or make overseas acquisitions, began pledging their stakes in their companies in exchange for loans.

But within weeks, India's stocks began plunging, losing around 60 per cent of their value last year, and leaving many of these same controlling shareholders suddenly at risk of not only losing money, but also the companies they had built over decades.

"It's part of a bull market frenzy � at the top of a bull market, nobody ever believed that things would get this bad and so quickly," said one senior equities analyst in Mumbai.

"It's not only the extent of the price fall, it's the pace at which it has happened. It has been disruptive."

The first to fall was B. Ramalinga Raju, the founder of Satyam Computer Services [Get Quote]. A scandal at India's fourth largest outsourcer became public because lenders began liquidating shares pledged to them as collateral.

When the market regulator, the Securities and Exchange Board of India, responded by making it compulsory for controlling shareholders to reveal their borrowings against shares, nearly 500 companies revealed pledges that at today's depressed market values are worth around $13bn.

At about 4.5 per cent of the free float of the market, the pledges are enough to affect sentiment surrounding share prices.

Banks and lenders usually lend against shares at a margin of at least 50 per cent, or $2 of shares as collateral for every $1 of credit.

If the value of the shares falls below the margin, companies have to top it back up or risk having the banks or lenders sell off the shares to recover their money, sinking the stock price at the same time.

The share pledges by the parent entities of large groups such as Tata are also worrying, given the large amount of borrowing already on their companies' corporate balance sheets.

Tata Motors [Get Quote] has borrowed $3bn for its acquisition of Ford marques Land Rover and Jaguar, much of which it is still trying to refinance. The group borrowed $11bn for its acquisition of Corus, most of which has been refinanced but which has come at a time when steel prices are under pressure.

"They gone around making acquisitions like Corus at the peak of the cycle at fancy valuations and using a lot of financial leverage," said one analyst.

But while Tata will come under increasing pressure if the economic cycle continues to worsen, a lot of smaller Indian companies, particularly in real estate, are already in trouble.

The controlling shareholders of property company Unitech have pledged 49 per cent to lenders, or most of their 67 per cent stake. With India's real estate market in a tailspin, Unitech and its peers have little prospect of selling new equity or raising new debt.

"During the heyday, developers were pledging shares casually ... but now that the tide has turned many of them are unlikely to pay back their debts and will lose control of the shares they pledged," said Bhaskar Chakraborty, a real estate analyst at India Infoline [Get Quote].

"Lenders have already started to panic, but it will get worse if the market doesn't rebound," Mr Chakraborty said.

Copyright The Financial Times Limited 2009