Which Small Cap Companies have highest Promoter’s Pledging? – Feb 2019

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?

We can compare the pledging of share by the promoters in India 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.
Though there are some similarities, we cannot directly compare these two. 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. No doubt it is their share and they can do anything but is has a lot of risks.

Example of Companies with Pledged Promoter Holdings

These are all small cap companies.

Small Cap Companies with Pledged Promoter Holdings
Small Cap Companies with Pledged Promoter Holdings
Small Cap Companies with Pledged Promoter Holdings
Small Cap Companies with Pledged Promoter Holdings

The pledged share percentages are a percentage of the whole promoter holding. For example, 58.25% of 74.43% (and not 58.25% from 74.43%) 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 if 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.

small cap companies with pledged promoter holding

  1. Sanghi Industries is a manufacturer and distributor of cement with a major focus in West India. With D/E ratio being less and pledged promoter holding so high, the promoters have mostly invested the money elsewhere.
  2. Jindal Stainless is a company of Mr. O. P. Jindal. Here, there are chances that the pledging has happened with the purpose of investments in the company itself.
  3. Jindal Stainless Hisar is also of the O. P. Jindal group and is in the same situation.
  4. Reliance Power is of the Anil Dhirubhai Ambani Group (Reliance Group), and the overall group has a lot of promoter pledging. The Group has a debt of almost Rs. 1 lakh Cr with no proper plan of repayment in place.
  5. The promoter holding of Dish TV has a reduced by a small amount. The declarations have not yet been displayed on the website of BSE India. But still the pledging remains very high.
  6. Coffee Day Enterprises is the owner of the Café Coffee Day joints. The company is involved in a major capital-intensive industry. The industry incurs huge costs of labour, rent, etc. The company has a lot of pledging problems and not even is profitable. The promoter, Mr. Siddhartha, has some share in the company Mind Tree, which he is planning to sell from where some recovery can be done and the pledging may get reduced.
  7. Future Enterprises is a part of another pledge group, the Future Group. In almost all the companies, the promoter has pledged its shares. Future Enterprise is an ideal example to understand in what of business the promoter should not invest or enter. The company has entered in almost all types of businesses and is now facing problems. They entered into financial services with Future Generali, also entered in the telecom sector. All these venturing was done by Mr. Biyani through Future Enterprises.
  8. Reliance Capital is also of the Anil Dhirubhai Ambani Group (Reliance Group). This company does not have any problems with its business, only the promoter pledging is a little concern. Reliance Capital is involved in lending business, so a high D/E ratio is of no concern.
  9. There are 2 groups under Bajaj Group, one is Rahul Bajaj group and the other is Shishir Bajaj group. Bajaj Consumer is of the Shishir Bajaj group. The D/E ratio is very low which clearly indicates that the promoter has used the money for investment in other things.
  10.   India Power Corporation is involved in Power generation and distribution. Not many investors know about this company as it is a comparatively smaller company.
  11. Omaxe Ltd is majorly present in North India and Madhya Pradesh. It is a real estate company and the real estate industry is as it is going through a slump.
  12. Steel Strips Wheels is a kind off an Auto-ancillary company which produces rims for tyres. Here, there are chances that the promoters have invested the money in their businesses only. Also, the auto industry is also in the downtrend phase which will continue for the nest 6-7 months.

summary

  • It is better for the retail investors to avoid these stocks as whenever the stock market experiences negativity, the stocks with high promoter pledging get hammered the most.
  • Investors can use high pledged promoter holding for the initial screening of stocks to invest in. If the pledging is high the investors should definitely not keep those stocks in their radar.
  • Promoters should focus on their core business first rather than running after not so sure business opportunities.
  • There are better peer companies of all the companies mentioned above in the market without the problem of pledged promoter holding which can be considered for investments.
  • Recently there were major corrections in the share price of many companies with high pledged promoter holding.
  • 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.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.

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