MUMBAI: Fearing investor backlash in the wake of SEBI’S recent directive on pledged shares, promoters are scrambling to redeem the shares they have pledged with financiers from whom they have borrowed funds. Early last week, the market regulator had ruled that promoters will have to disclose details of their holdings pledged with lenders.

Brokers say promoter groups of many companies — including some of the blue chips — have borrowed funds by placing their holdings as collateral with the financiers.

Investor aversion to this practice was evident last week, when United Spirits shares fell 35% in two trading sessions after it was learnt that a significant chunk of promoter holdings were pledged with various lenders.

“Disclosures about pledged shares will trigger a negative reaction from investors if it is revealed that the promoters are highly leveraged. It may also send out signals that the promoter is not financially strong,” said a senior executive of IL&FS, one of the largest promoter financiers in the country.

According to financiers, promoter financing (loan against shares) was rampant till a year ago when funds were cheap. Promoters simply pledged a part of their holdings in the company for a set term and interest rate. The tenure of the loan — mostly short-term — would vary between three months to two years, at an interest rate in the range of 20-30% per annum.

The hairline cut for the loan would be in the range of 40-60% (of the value of pledged equity), depending on the risk profile of the business and the stock. With the borrowed money, promoters would fund working capital requirements, make open purchases from the market, subscribe to warrants, or make preferential allotments to themselves in order to boost the confidence of investors in the company.

The sustained downturn in equities over the last one year has pushed promoters to the wall, as the value of collateral (shares) dipped with every fall in market. Promoters who could meet margin payment obligations, or furnish additional shares as collateral, could only watch helplessly as their shares were dumped by lenders.

According to brokers, investors may not very comfortable with promoters who have borrowed money to fund personal needs, or unrelated diversification. “If the promoter has borrowed money for long-term benefits of the company, investors shouldn’t be really worried.

If the money is for personal use, or unrelated diversification, the stock will see a sell-off,” said Motilal Oswal, chairman of Motilal Oswal Financial Services
, which also operates an NBFC. Promoters are running pillar to post to retire their debt (on pledged shares) or swap the collateral. “Promoters are enquiring if they could swap pledged shares with personal assets like land or building. A few of them were wanting to shift the pledge from their personal capacities (as promoters) to the company’s balance sheet,” said the CEO of a large-sized NBFC on conditions of anonymity.

Adds Gagan Banga of Indiabulls Financial Services: “Promoters who have not disclosed their borrowings, may try to retire their debts in the coming days. Investors may not take lightly of promoters who borrowed money without making it public. The coming two weeks will differentiate the good promoters from unethical ones, from the point of view of disclosures,” Mr Banga added.

source: Economictimes

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