Business promoters frequently pledge their own shares with lenders in order to raise funds on a personal basis. This practice is very common in Indian companies.
Collateral simply means taking out loans against the shares you own. Stocks are a type of asset. They act as collateral against the loans. Any natural or legal person who holds shares can pledge them.
Shares can be pledged by the promoter of a business to obtain cash for various purposes. The amount raised can be used for a variety of purposes. This includes support for other businesses, working capital requirements, debt repayment, etc.
When a significant percentage of the shares held by the promoters are pledged, this can have a negative impact on the value of the shares held by the shareholders. The stock is generally considered a high risk investment.
Recently, we covered a similar article on the topic of pledging promoters. We have discussed popular companies where the promoters have pledged a huge amount of their stock.
You can read the full article here: Actions with the highest pledge of the promoter
In the continuity of this, here are some other actions of which the promoter is committed to more than 50%.
1. Ruchi Soya Industries (100%)
Ruchi Soya, owned by Patanjali Ayurved, owns 98.9% of the promoter in the company. Of this total, the promoters pledged 99.97% of their holdings in June 2021.
Since March 2020, the pledge of promoters has remained above 99%.
The edible oil company is ready to launch its follow-up public offering (takeover bid) in the coming months to lower the participation of promoters in the company.
Recently, the company finally received approval from the Indian stock market regulator to launch an FPO of US $ 585 million.
The need for promoters to reduce their holdings to meet the public shareholding standard of at least 25%. He has until December 2022 to achieve this goal.
Patanjali had acquired Ruchi Soya for $ 620 million, through a bankruptcy court order, in December 2019 after billionaire Gautam Adani withdrew from the bidding process.
2. Vedanta (100%)
The promoters of Vedanta have pledged their entire stake in the mining company to raise funds for the Indian unit’s takeover bid and to service the debt.
In total, 2.4 billion Vedanta shares held by the promoter entities are encumbered. This is 99.9% of the promoter’s total stake in Vedanta – which amounts to 65.18%.
The charge relates to $ 1.2 billion in bonds issued by Vedanta Resources Finance II Plc. The 8.95% senior guaranteed bonds mature in 2025. Citicorp International is the trustee of the bondholders.
The funds raised will be used for the acquisition or any remaining proceeds will be used to service the debt of certain entities of the promoter group.
Last week, Vedanta Resources (VRL) owned by Anil Agarwal’s family through Volcan Investments, a holding vehicle with a 61.7% stake in the company, announced that it had reduced its net debt by $ 300 million to first half of this fiscal year and expects to further reduce its debt by US $ 500 million in the second half of fiscal 2022.
With Volcan’s debt repayment in full, the pledge on all of VRL’s shares has been released, the company said in a statement.
Interestingly, the company’s shares have risen 122% over the past year. Currently the company has a market capitalization of ??1,118.99 billion.
3. Forbes & Company (98.2%)
The promoters of Forbes & Company hold 73.8% of the company’s capital, of which 98.2% is pledged.
Recently, Shapoorji Pallonji Group (SPG) sold a majority stake in its consumer durables business under the Eureka Forbes label to the US private equity fund Advent International for an amount of ??44 billion.
Eureka Forbes is a subsidiary of the listed parent company Forbes & Company.
Forbes is a small cap company with a total market capitalization of ??54 billion. Currently it is trading at ??4,184 per share on BSE. Over the past year, the stock has risen 188%.
It is mainly engaged in the activities of manufacturing and marketing of engineering products, real estate development projects and rental of premises.
To learn more, check out the latest shareholding model from Forbes & Co.
4. CG Power & Industriel (95.8%)
CG Power & Industrial’s total commitment amounts to 95.8% of the promoters’ participations. The promoters of the company hold around 53.25% of the total capital.
The promoters slightly increased their stake from 53.24% to 53.25% in the June 2021 quarter.
In contrast, foreign institutional investors (FIIs) have significantly increased their participation. They hold about 10.7% against 4.66% last year.
Meanwhile, over the past three quarters, the company’s mutual fund holdings have remained almost constant at 4-5%. At one point in September 2019, mutual funds held a 23% stake in the company.
CG Power and Industrial Solutions, a Murugappa group company, has approved a proposal for voluntary liquidation and closure of its non-operating businesses.
CG Middle East FZE is a declining non-operating subsidiary, while CG International (Holdings) Singapore is a wholly-owned subsidiary of the company.
The board of directors also approved a proposal to close one of its non-operating subsidiaries, CG Power Solutions, under the provisions of the Insolvency and Bankruptcy Code.
CG Power, which was acquired by Tube Investments of India in 2020, posted consolidated net income of ??480m in the June 2021-22 quarter mainly due to higher revenues.
Over the past year, shares of CG Power and Industrial Solutions have jumped nearly 280%. In September 2020, its share price was ??24. Currently, it is trading at ??92 on BSE.
5. Panacea Biotec (94.27%)
The promoters of Panacea Biotec own 45 million shares of the company and have pledged 42.4 million.
This represents 94.27% of all shares held by the promoter and 69.37% of the total outstanding shares of the company.
The total holdings of the promoters of the company, including pledged and non-pledged shares, amounts to 73.59%. During the last 6 months, the promoter’s participation in the company has remained almost constant.
Panacea Biotec is a health management company. The main activity of the company is the manufacture of allopathic pharmaceutical preparations.
Recently, Panacea Biotech and the Russian Direct Investment Fund (RDIF) announced the first delivery of one million doses of the second component (human adenovirus serotype 5) of the Russian coronavirus vaccine Sputnik V for sale in India.
Panacea has partnered with RDIF to manufacture Sputnik V in India. This move will help the business generate adequate income.
6. Jindal stainless (86.6%)
A large part of the promoters’ holdings is pledged in this stock. According to the data available on BSE, the promoters of Jindal Stainless hold 68.12% of the company’s capital. Of which 86.6% collateral.
Three weeks ago, Jindal Stainless clarified various questions from some investors. The company highlighted a buzz that circulated on social networks by associating the name of Jindal Stainless as well as the companies which have the greatest commitment of promoter.
In its regulatory filing, Jindal Stainless stated:
In this regard, the company has in the past clarified its position and reiterated that this information is misleading and does not represent the true picture.
The company, to assure its shareholders, would specify once again that there is NO recent borrowing against shares (LAS) and that there is therefore no link between the pledged shares and their value. Merchant.
In addition, Jindal Stainless said that in fact, the rating agencies, ie. CRISIL and Fitch’s India Ratings recently upgraded the company’s credit ratings for long-term credit facilities to ‘A +’, the main reasons being accelerated deleveraging, prepayments of debt, as well as strong operational performance leading to a healthy balance sheet.
Apart from the above, here are other companies where the promoters have pledged their shares.
Promise of the promoter: windfall or curse?
Is the promoter doing the wrong thing? Absolutely not.
After all, promoters need the funds and they can use their stake in the business to do so. If these funds are redeployed into the core business, it should bode well for the business.
If the loans are taken out for personal needs, this should be treated as a warning signal.
Although the question remains, why have other sources of funding not been used by the company?
Pledging shares is not an illegal activity as banks often seek additional security in the form of promoter shares.
However, you need to keep an eye out for these businesses, especially those with questionable management.
Here’s what chief small-cap analyst and Hidden Treasure editor-in-chief Richa Agarwal thinks about promoter engagement:
The promoter using pledged shares as a means of raising capital is acceptable. However, from the perspective of a small retail shareholder, a large number of pledges with bad financial values ââcould cause banks or financial institutions (which hold these shares as collateral) to abandon them to collect their contributions.
This would then have a cascading effect on the share price, resulting in a huge loss for the shareholder.
It is always best to verify the promoter’s commitment before making any investment decisions.
Over-leveraged companies with a high percentage of pledged shares could very well prove to be value traps.
This article is syndicated from Equitymaster.com
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