The current article highlights different aspects of share pledge by the promoters of any company. The article also guides public shareholders on the interpretation of the pledging of shares done by promoters.
Why promoters raise money by pledging of shares?
How to know the amount of share pledge done by the promoters?
Difference between share pledge by promoters of small companies and large companies.
What does release of pledge of shares by Bank/NBFC means?
Pledging of Shares
Query 1)
Dear Mr. Vijay Malik,
Is it possible for us to find out whether the proceeds received from the pledging done by the promoter are reinvested into the business i.e. a simple case of the promoter pledging the shares for investing into the business? Thanks and regards
Query 2)
Dear Mr. Vijay Malik,
I came across a news that the promoters have pledged most of their shares but the company’s stocks are still in the rally. In this case, will the proceeds of the pledged shares will come to the company as other income? And how to know that the promoter has really spent that money for business? Thanks and regards
Query 3)
Sir found this data on pledging:
“Promoters, in order to raise funds for either personal or company needs, pledge their holding shares to any financial institution.
Non-banking financial institutions are more active than banks in providing such loans. Sometimes, promoters collateralize their shares for converting warrants into shares. Also, they might find share prices in the secondary market quite lucrative for fresh purchase and adopt this route for garnering funds for the consideration to be paid for the open market purchase. So there are lots of reasons why promoters pledge their shares. Generally, pledging shares is not a good sign.”
My view:
The pledging of shares by the promoter won’t increase the other income. However, it should increase the interest cost in P&L, as it is a kind of loan taken by the promoter against shares collateralize with banks / non-financial institution.
I found the pledging of shares mentioned in long-term borrowing for GMR Infrastructure Limited.
My doubt:
If the promoter is taking a personal loan, then I don’t think it will reflect in the balance sheet of the company.
Sir, please give your views and please correct me if I am wrong. Thank you
Author’s Response:
Hi,
Thanks for writing to us! We appreciate the work/effort put in by you incorporate your responses. We request each one of us to first trying to search for the answers independently and if there are still doubts then post the query on this forum. Searching for answers on one’s own is a good learning exercise and inculcates a very good habit of seeking solutions.
Please find below our inputs to your queries:
1) My view: The pledging of shares by the promoter won’t increase the other income. However, it should increase the interest cost in P&L, as it is a kind of loan taken by the promoter against shares collateralize with banks / non-financial institution.
Pledging of its shares done by the promoter can be for 2 purposes:
(i) for raising money for personal use/buying shares/exercising warrants etc.
(ii) as an extra collateral/security when asked by the lender while giving a loan to the company
You’re right that pledging won’t impact the other income of the company in any manner. Actually, pledging won’t impact the P&L on its own at all.
In case (i) above, the loan is taken by the promoter and he would service the interest from his personal money. It’s a separate matter that promoters usually increase their salary/dividend payout to meet the funds requirements to pay the interest.
In case (ii) above, the interest in the P&L would be because of the loan is taken by the company from the lender and not due to pledging.
2) I found the pledging of shares mentioned in long-term borrowing for GMR Infrastructure Limited.
In case (ii) above, when pledging is as an extra collateral/security when asked by the lender while giving loan to the company, then the details of pledging would be shown as part of security offered to lenders in the notes/schedules to financial statements under “Long-term borrowings” or “Short-term borrowings”, as the case may be.
However, in any case, the amount of share pledge done by the promoters will be clearly shown in the disclosure of shareholding pattern done by the companies every quarter.
Further Reading: Understanding The Annual Report Of A Company
3) My doubt: If the promoter is taking a personal loan, then I don’t think it will reflect in the balance sheet of the company.
You are right as this case would be the case (i) cited above. Here the loan is a personal loan of the promoter and they are responsible for servicing it from their personal sources. However, as mentioned above, even though the loan is a personal loan of promoters, usually increase their salary/dividend payout or take loans from the company to meet the funds requirements to service these loans. Such actions of the promoters to take the money from the company to service their loans would indirectly impact the company and its financial situation.
Further Reading: Why Management Assessment is the Most Critical Factor in Stock Investing?
Hope it answers your queries.
All the best for your investing journey!
Regards,
Dr Vijay Malik
Interpretation of Share Pledge by Promoters
Query 1)
Hi Vijay,
I hold shares of a company named Menon Bearings Ltd. Last month they announced an interim dividend of INR 1 per share. Recently, the promoters have pledged 8.3% of their shares to Bajaj Finance Ltd for reasons not explained in the report submitted to BSE.
Promoter holding before pledge is 75%.
Number of floating shares – 46,700,000
share pledge % – 8.3 %
Amount of pledged shares – 5,604,000
I’m curious why the company has to pay an interim dividend, instead, they could have used the amount on capex.
Thanks,
Query 2)
Hi Vijay,
I have done a personal analysis of Cox and Kings and I am bullish on this stock due to strong financial parameters. But one thing that concerns me is that the company has some 45% of promoters total shareholding pledged. I know that share pledge is dangerous and have seen the terrible consequences in the past. But is it also dangerous when the company has solid interest coverage ratio and very good free cash flow and future also looks pretty bright
Query 3)
Dear Sir, Namaste,
My question is how to get information regarding quality of management through “Promoter share pledge” if company is in good profits last several years
Ex: Navneet Education
Sir How to analyze share pledge by promoters?
Author’s Response:
Hi,
Thanks for writing to us!
Ideally, any share pledge of promoters’ should be seen with caution. However, many times, banks/lenders stress on promoters of small companies to pledge their shares in favour of banks, in order to mitigate their risk and to increase the commitment of the promoters in repaying their loan.
If the promoter is a small time entrepreneur, then he/she has no other option but to pledge the shares, however, promoters of large companies have many other competing financial institutions, which can give them loans. Therefore, if the shareholding of the promoter of a large company when pledged, should be seen with extreme caution and should be analysed further to know whether the promoters’ shareholding is pledged for loans taken by the company or for loans taken by the promoter in its personal capacity. The annual report of the company contains required information to make this judgment.
It is highly advised to read the analysis of Omkar Speciality Chemicals Limited, which is a good case to understand the issue of pledging of shares by company promoters:
Read: Analysis: Omkar Speciality Chemicals Limited
Therefore, any pledging of shares by promoters of large companies should be treated with caution.
Regarding, payment of dividend instead of using the money for capex. We believe that the best way to get such clarification and understanding the future plans is to contact the company directly. You may contact the investors’ relationship officer or the company secretary for the same.
Further Reading: Steps to Assess Management Quality before Buying Stocks (B)
Hope it answers your concerns.
All the best for your investing journey!
Regards
Dr. Vijay Malik
Release of Share Pledge by Bank/NBFC/Financial Institution
Dear Dr Vijay,
What does release of share pledge means?
Thanks
Author’s Response:
Hi,
Release of share pledge means that the shares, which were given as security to lenders for loans taken, are now released by lenders.
Most common reason for release of shares is that loan has been repaid.
Regards,
Dr Vijay Malik
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DISCLAIMER
The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
Currently, I do not own stocks of the companies mentioned above in my portfolio.
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