The markets were spooked last week on the pledged shares issue. Many companies were badly affected and this was great stuff for discussion on media channels. First some basic facts about what is needed as per law.
Promoter groups which include promoters, their associates and persons acting in concert have to inform the stock exchanges of any shares that they have pledged. This has to be done each time shares are pledged/unpledged. It is not mandatory as yet to inform the name of the entity to which the shares have been pledged or unpledged. Once the shares are sold by a lender or a person to whom the shares have been pledged, the information that these were pledged shares and have been sold would appear as a declaration from the promoter or promoter group entities. The person or lender who has sold his name would appear in the bulk deals if he has sold 0.5% or more of the equity of the company on a single day. He would not be responsible for giving a declaration under SAST (substantial acquisition of shares and takeovers) regulations 1997, if he does not hold less than 5% or is included in the promoter group.
One would recall some classic cases where the promoter of Great Offshore lost control of the company to Bharti Shipyard after he was unable to repay the mark to market losses on the share. Yet another example was Orchid Chemicals where the promoter almost lost control of the company due to the sale of his pledged shares.
Let us take the example of GTL Limited. The share on Friday the 17th of June opened at Rs 407 against the previous day’s close of Rs 406.95. The share made an intraday low of Rs 316.45 and closed at Rs 339.90. Monday the 20th of June saw a blood bath with the share dropping to an intraday low of Rs 124.10 and closing at Rs 127.80, a loss of Rs 212.10 or 62.4%.
Monday saw huge turnover and deliveries and there is no declaration under SAST that shares have been sold. The question is whodunit? Very clearly shares have been sold for delivery as the names have appeared in bulk trades. They are not part of the promoter group and they appear in all probability to be shares that have been sold against margin calls. With no declaration forthcoming the issue becomes murkier and more intriguing. One interesting thought on the issue is these were “benami” holdings of the promoter group and therefore there has been no declaration so far. The nett loss to the share in a mere six trading sessions is down from Rs 406.95 to Rs 109.75, a loss of Rs 297.20 or 73.03%.
Group company GTL Infra has had also suffered huge losses with the stock falling from Rs 32.05 on Thursday the 16th of June to Rs 16.05 at close on Friday the 24th of June. Net loss is Rs 16 or 49.92%.
The third share to get affected was S Kumars Nationwide where the shares of the promoter were pledged as additional collateral to the lenders consortium IDBI when the company went in for a CDR package. As per the terms of the package, the entire shareholding of the promoters was to be pledged to the leader of the lenders consortium which in this case was IDBI. Shares of this company too got hammered and the price which was at Rs 66.90 on Thursday the 16th of June, hit an intra day low of Rs 41.65 on Tuesday before closing at Rs 52.55 on Friday the 24th of June. The net loss was Rs 14.35 or 21.45%.
The moot point which emerges from all of this is basically two points. The first is that all the shares involved were part of the Futures and options category and therefore easy to trade and one can carry forward the trade from day to day. Second intraday the electronic media and various chat groups etc were active in these counters and brought the price down. The markets were in a negative frame of mind and players took advantage of the same.
What can be done to minimise shareholder being hurt going forward? The name of the lender or person to whom shares are pledged be made mandatory at the time of making the pledge so that the name can be co-related. Secondly when pledged shares are sold of an entity who is labelled as a promoter, the lender or person to whom shares are pledged should give a declaration to the exchanges that he has sold such shares.
I believe these measures will go a long way in instilling some confidence on this issue of pledged shares. As far as the managements are concerned, prompt action by them and proper disclosures will always keep the transparency level high and lead to good corporate governance.
Even this time around quite a few lists of shares and companies where promoter holding is pledged are being circulated and are vulnerable going forward.
I believe one should appreciate the prompt action of the management of S Kumars Nationwide calling for an analyst call on Friday and clarifying the position for all concerned. One hopes that the management of GTL and GTL Infra does clarify the sale by various entities on Monday 20th of June for the benefit of all concerned.
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