Promoter share pledging hits 3-year high in August: Report

High pledge levels are typically not considered a good sign by the investors as a downturn in the market price can lead to invocation and change in management.

Pledging of shares by promoters in the NSE-listed firms reached at 1.86 percent of the total market capitalisation in August, making it the highest in three years, according to a report by primeinfobase.com on Monday. Prior to that, it had hit a high of 1.88 percent in April 2017.

The value of shares pledged by promoters of the National Stock Exchange-listed companies surged 56 percent to Rs 2.77 lakh crore as on August 2020, compared to Rs 1.78 lakh crore as on July 2020, as per primeinfobase.com, an initiative of Prime Database Group. "This increase was primarily driven by pledging of shares by promoters in Hindustan Zinc and Vedanta for the purpose of the delisting of Vedanta," said Prime Database Group Managing Director Pranav Haldea.

As of August, shares were pledged in 463 of the 1,656 main-board firms listed on the NSE, compared to 461 companies in the preceding month-end. High pledge levels are typically not considered a good sign by the investors as a downturn in the market price can lead to invocation and change in management.

Surprisingly, there were as many as 29 companies in which 100 percent of the promoters was under pledge as on August 2020. Besides, there were 81 firms in which more than 90 percent of the promoter's stake was pledged and 192 companies in which over 50 percent of the promoter's holding was pledged.

"Pledging of shares by promoters in companies listed on the NSE reached a 3-year high of 1.86 percent of the total market capitalisation of all companies listed on the NSE as on August 31, 2020," the report noted. In June 2019, Sebi mandated that where pledging of promoters (and persons acting in concert) is more than 20 percent of the total share capital of the company or 50 percent of the total promoter holding, promoters will be required to disclose detailed reasons for encumbrance separately.

In August, there were 230 such companies listed on the NSE. Companies that moved from zero percent to some percent pledging of promoters' holding from July to August were Hindustan Zinc (to 100), Vedanta (to 99.99) and Max Healthcare Institute (to 13.35), the report noted.

Overall, there were 13 companies in which the percentage of promoter holding pledged increased in August. On the other hand, there were two companies -- Tirupati Forge and Jyothy Labs -- in which pledged shares were brought down to zero in August, it added.

Overall, there were 51 firms in which the percentage of promoter holding pledged decreased in the month. The market share of domestic mutual funds increased from 26.23 percent as on July to 49.76 percent as on August, with the value of such pledged shares going up from Rs 46,654 crore to Rs 1,38,049 crore. This included cases where debenture trustees' names, who may hold shares directly or on behalf of the lender, are reported under name of entity in whose favour shares are encumbered.

Non-banks saw a decrease from 52.85 percent to 36.68 percent during the same period, while the share of Indian banks dropped from 20.21 percent to 14.43 percent.