Promoters slash pledges by a record $11 billion in Q4

Promoters of India’s top 500 companies, which contribute 96% to the overall market value of listed firms, have brought down their share pledges by at least ₹88,345 crore (approximately $11 billion) during the March quarter. Mint research based on the latest regulatory filings shows this is a record pledge reduction by Indian companies in any single quarter.

Top companies whose promoter pledge values have come down include Adani group’s listed firms, Vedanta Ltd, Hindustan Zinc Ltd, Indus Towers Ltd and JSW Steel Ltd.

During the March quarter, the market value of the top 500 companies fell by 6.4% as the index fell from 15,581.95 points on 31 December 2022 to 14,577.15 on 31 March. At present, the Nifty 500 has a market cap of ₹25,266,403.25 crore.

As per latest filings, the value of promoter pledge in these Nifty 500 companies has come down by about 21% from ₹4.39 trillion at December end to ₹3.5 trillion on 31 March. This indicates that the reduction in pledge value is primarily due to the massive release in the number of shares that were pledged by promoters.

The filings reveal that during the March quarter, several top companies, apart from those belonging to the Adani group, saw a significant reduction in promoter share pledges. JSW Steel’s promoters have reduced their pledge from 17.57% to 16.35%, Ajanta Pharma from 19.87% to 11.41%, Triveni Engineering from 15.06% to nil, Max Financial from 92.96% to 85.05%, Asian Paints from 7.62% to 7.41%, United Breweries from 14.97% to 14.45%, and Lemon Tree Hotels from 11.88% to 6.43%.

The reduction not only reduces the market risk for common public investors, but also may protect promoters from allegations over promoter debt, leverage levels or share-backed loans that can erode the company’s reputation and market value significantly.

Promoters’ share pledges expose investors to severe price volatility if the promoter fails to meet repayments or provide additional collateral in a falling market.

The value of the pledged portion of the promoter shareholding is linked to the daily stock price, and therefore, a fall in the stock price below a threshold level leads to a margin call, requiring promoter to pledge additional shares to make up for the erosion in value.

Recently, following the 24 January Hindenburg Research report, some Adani group firms faced margin calls from banks after their shares lost a total of $145 billion in market value. Subsequently, its promoters repaid about $2.55 billion to get a significant portion of the pledges released. The move is attributed to Adani group’s efforts to allay investor concerns after Hindenburg Research alleged that the group is over-leveraged with total debts of ₹2.27 trillion.

In case of high pledge levels, if the promoters are unable to meet the margin call, lenders may cover the losses by actively selling the pledged shares in the market, which could accelerate the price fall.

The Indian market has been extremely volatile due to high inflation, rising interest rates, geo-political tensions due to the Russia-Ukraine war, failure of global banks and a tepid global economic environment.

Companies do not disclose the reasons for promoters pledging their shares, and since retail investors are generally not aware of such pledge details, they incur losses when the prices turn volatile. The recent spree of pledge releases seems aimed at comforting investors amid the ongoing market volatility, in which any steep fall in stock prices may result in margin calls that can increase the risk for public investors.

In the March quarter, the Nifty 50 index fell by 4%, the Sensex 3%, the Nifty Energy Index 11.81%, and the Metal Index 19%. The Nifty services sector index fell 7.3%, and the S&P BSE India Power Index fell 17.7%, while the S&P BSE Capital Goods Index gained 3.08%.

A closer look shows that the largest release in promoter pledges during March quarter in terms of value happened in the power sector: ₹20,971.57 crore. Top companies in this sector with the highest amount of pledge releases include Adani Power ( ₹7,721.21 crore), Adani Transmission ( ₹11,216.45), JSW Energy ( ₹507.50 crore), Suzlon Energy ( ₹395.89 crore), Kalpataru Power ( ₹88.71 crore), and Tata Power ( ₹36.81 crore).

In the second position is the cement and construction materials sector, with Rs. 20,691.73 crore worth of drop in promoter pledge. The pledge value has been reduced by Rs. 19,892.2 crore in Ambuja Cements and by Rs. 966.2 crore in ACC.

The ports and shipping sector takes the third spot, with Adani Ports alone seeing a fall in pledge value by Rs.16,043.12 crore.

To be sure, all the aforementioned sectors, are debt-heavy, as promoters have taken bulky long-term loans for developing projects and then start repaying from the cash generated after the project reaches completion.

Elsewhere, pledge value has fallen by Rs. 10,284.13 crore in the mining and metals sector, Rs.1,558.23 crore in the paints sector, Rs. 144.85 crore in the real estate sector (Sobha Developers’ pledge value has fallen by Rs. 144.85 crore), Rs. 92.15 crore in the telecommunications sector (Tata Communications’ pledge lowered by Rs.24.73 crore), and Rs. 43.09 crore in the chemicals sector (Vinati Organics pledge cut down by Rs. 9.16 crore) during the March quarter.

Some companies saw a marginal increase in their pledges during the quarter.

Aster DM Health’s promoter pledge has gone up the most (Rs. 4,518 crore), marking an increase from 3.95% to 41.41% during the March quarter.

Promoters pledge their shares mostly with banks or non-banking financial institutions (NBFCs) as collateral to raise corporate loans or to raise money in their personal capacity to infuse equity in the company. With banks, which generally provide project-specific funding, shares are mostly pledged as secondary collateral, and the promoters are given adequate time to bridge the gap between the original value of the shares pledged and the reduced value.

The risk of selling promoter shares provided as collateral is not so high in the case of banks. However, with NBFCs, since the shares are pledged as primary collateral, they trigger the margin call when share prices fall and breach the threshold price, and promoters are asked to bridge the gap immediately. Typically, the (share-backed) loan-to-value (of collateral) ratio is required to be maintained at 1:2.

Any failure by the promoter to provide additional collateral in the event of a fall in stocks may result in the sale of shares in the secondary market by the NBFC, which leads to a further decline in share prices.

During the March quarter, the companies that saw the maximum reduction in pledge value have been mostly trading in the red. Ambuja Cements lost 30.25%, Adani Ports 22.76%, Adani Transmission 61.64%, Vedanta 11%, Adani Power 36%, Adani Enterprises 54.6%, Hindustan Zinc 8.81%, Adani Green 24.91%, Indus Towers 25% and JSW Steel 10.4% during the March quarter.

The Adani group is currently planning to increase its operating earnings by over 50% to Rs. 91,000 crore by the end of FY25.

Last week, Indus Towers reported a 23% drop in consolidated net profit at Rs. 1,399 crore for the quarter ended March 2023.

Recently, JSW Steel reported its highest-ever quarterly consolidated crude steel production at 6.58 million tonnes for the March quarter, up 13% year-on-year.