Shareholdings moves in Q4: Pledging peril hits smallcaps, escalating investor worries
Summary
In the concluding part of our shareholdings series, we explore how volatile markets expose the rising financial strain in smaller firms.
Imagine a tightrope walker in a storm—that's akin to promoters of several BSE-listed companies in the March 2025 quarter. Buffeted by volatile markets, they sharply rejigged their pledged shareholdings, a tell-tale sign of rising financial pressure. A deep dive by Mint into 3,716 BSE entities reveals this dramatic churn, particularly highlighting the growing strain on smaller players as they navigate the unpredictable economic winds.
While the number of companies where promoter pledging exceeded 90% dipped slightly to 34 in Q4FY25 from 35 in the December quarter and 40 a year ago, the trend still highlights persistent stress. "Promoter pledging signals corporate finance stress and governance risk. A high pledge indicates risks the company might face. Studies show companies with high promoter pledges see higher market volatility. Promoters' shares, held as collateral, can be sold to recoup losses. In a price crash, lenders may panic sell, triggering a market spree," said Vivek Sharma, head of investment at Estee Advisors.
“Moreover, pledging is costly, with lenders imposing high interest rates and strict loan-to-value ratios. This pressures future earnings, requiring growth above capital costs to create value. While not always leading to poor performance, high pledging shows a strong correlation with it," he added.
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Flashpoints of concern
The steepest rise in promoter pledging is concentrated in small-cap companies, the Mint analysis shows, whose falling stock prices point to mounting investor anxiety about their financial foundations.
Topping the list is IL&FS Investment Managers, a financial services firm, where promoter pledging spiked from zero to 100% in just one quarter. The market reacted sharply, with the stock falling 18.93% during the same period. Real estate player Marathon Nextgen Realty followed closely, as its promoters increased pledged shares from nil to 91.46%, resulting in a 12.02% drop in its stock price.
Auto component manufacturer NRB Bearings also saw a significant rise in promoter pledging, reaching 91.35%, while its share price declined 27.97%. Even companies that had relatively lower promoter pledging levels to begin with weren't spared after steep increases. In the case of textile exporter Gokaldas Exports, pledging rose dramatically from 22.37% to 96.28%, triggering the steepest fall among the group, with the stock tumbling 28.84%. Meanwhile, chemicals and flooring products manufacturer Royal Cushion Vinyl Products reported an increase in promoter pledging from 3.86% to 76.5%, alongside a 3.28% dip in its share price.
Harshal Dasani, business head at INVasset PMS, noted, “The March 2025 quarter has reinforced a shift in investor psychology—any form of promoter pledging, whether rising or falling, is now met with suspicion. Markets are punishing even firms that reduced pledged shares, signalling that investors are reacting not just to the direction of pledging, but to its very existence."
This heightened scrutiny stems from tighter liquidity, macroeconomic volatility, and governance scandals in the mid- and small-cap space. “Even strategic pledging for business expansion is now under the scanner," Dasani added.
“There is also a risk that the promoter might lose control of management in distressed market conditions. Since promoters are often key personnel in the operations of the organization, a high pledge, especially above 50%, raises concerns among investors," said Sharma.
Also read Shareholdings moves in Q4: Indian Inc’s founders hike stakes in select small-cap firms
Good news falls flat
Supporting Dasani's claims, even drastic cuts in promoter pledging failed to prevent significant stock price declines. For instance, Inditrade Capital's complete reduction from 96.4% to zero was followed by a 51% drop in the March quarter. Future Market Networks experienced a similar fate, with a 40.6% price erosion despite zero pledging, all while the market experienced a shaky uptrend in that quarter.
Pakka, which operates in paper and packaging, reduced promoter pledging from 85% to 9%, but saw a 46.4% slump in its stock. Aster DM Healthcare and Bedmutha Industries also faced stock declines despite lowering their pledges.
“Empirical studies have found that while high promoter pledging does not always lead to poor performance, there is a high correlation between the two," Sharma highlighted.
This is the concluding part of a series of data stories on the latest shareholding pattern. Read previous parts of our shareholding series here.
