Promoters Pledging – 7 Large Cap Stocks to Avoid

Which companies have highest Promoter’s Pledging?

Recently, there is a lot of talk about promoters pledging their share. Many big companies are in the news because of the pledged promoter holding issues. Questions have arrived why are these companies pledging so much? Or why have the promoter pledged so much of their share? What are the impacts of these pledged promoters holding on their respective share prices?

The pledging of share by the promoters in India can be compared with the subprime crisis. Subprime crisis happens when there is a huge difference between the capacity and the supply. For example, if there was a capacity of Rs. 10, then the lending was done of Rs. 100. The subprime crisis cannot be directly compared but there are some similarities. So, what the promoters do is that they pledge the share and borrow money on these share as guarantee, the borrowed money is then invested in some other activities (in some other company). No doubt it is their share and they can do anything but it has a lot of risks associated.

Examples of Companies with Pledged Promoter Holdings

These are all Large Cap companies:

The pledged share percentage is a percentage of the whole promoter holding. For example, 45.51% of 62.30%% (and not 45.51% from 62.30%).
If D/E ratio is high and the promoter has pledged higher shares, then chances are the money is being used in the company itself. But id D/E ratio is less but still the pledged promoter holding is high, then it would indicate that there are some other business interests of the promoter and the money is being used there.

1. For ZEEL, as the D/E ratio is not high but the pledged promoter holding is, it clearly indicated that the borrowed money has not been invested in the core business.
2. Adani Ports is one of the biggest companies of Adani Group. In the case of Adani Ports there are chances that the pledging is done to raise the money for the company itself. But the fact cannot be denied that Adani group is huge and all the companies in the group are in capital-intensive sectors, so there might be chances that the money may have also been used in other companies of the group.
3. JSW Steel is considered a string company in the steel sector by the analysts. As it is a capital-intensive, the D/E ratio is bound to be high. But JSW Steel can also be given a benefit of doubt of using the borrowed money in the core business itself.
4. IndusInd Bank is a private bank. The D/E ratio is high because it is a bank and their core is business is of borrowing and lending.This is a notable scenario, as here the question is that, why did the promoter of a bank had to pledge its shares?
5. In United Breweries, From this promoters pledging percentage of 57.72%, 43% is held by Heineken and the rest is of Mr. Vijay Mallya. Almost full stake of Mr. Vijay Mallya is pledged. This company is an exception in this list.
6. Indiabulls Housing Finance is also involved in the business of borrowing and lending and that is why it has high D/E ratio. The promoter holding has been pledged mostly because the housing finance companies faced difficulties in raising money.
7. Asian Paints is a shocker in this list. Asian Paints in in a high growth industry and has a consumption driven business. So, when companies which are performing so well and are in their growth phases, do these kinds of activities then it can be an alarming sign.

Summary

1. When a promoter pledges the shares of the core company and uses the borrowed money somewhere else, then this is not good for the core company. This is called Promoters Pledging
2. For example, Mr. Subhash Chandra had pledged his promoter holding in Zee Entertainment Enterprise Ltd. (ZEEL) and used the borrowed money is his other business interests such as road projects or real estate projects. The impact of this decision can be clearly seen on the core business ZEEL.

Notes: –

• The numbers that are used are approximate and have been rounded for presentation purposes.
• We are not in any way saying that these are bad companies, or the stocks of these companies are bad.
• We are also not suggesting anyone to immediately go and buy these stocks or invest in the stock markets.
• Only an analysis has been presented here. No judgments or final statements are being made here.