Fundamental Analysis - Mortgaging Of Stocks

PROMOTERS MORTGAGING OF STOCKS IF ANY ?   

Mostly promoters of mid-and small-cap companies pledge large quantity of shares to borrow money. So, the chances of default on margin calls and the consequent selling by the lenders is high, said an analyst. 

He added that investors should try and exit small-cap companies in such cases, as the counters are very risky and these events accelerate sharp movements in these stocks. 

Fundamentally, strong companies may not see any impact on share price but many in the real estate and telecommunication sectors have seen extreme movements due to promoters pledging shares and investors are advised to sell shares.

HOW MUCH HAS BEEN PLEDGED ?

If the promoter holding is high at the time of pledging shares, investors should not worry even if they pledge more number of shares.

"But, if promoters are pledging over 30 per cent, investors should try and find out the reason behind shares being pledged," advises Thunuguntla. The good part is that promoters are only mortgaging their holding, not selling it.

You should be even more alert when promoters with lower holding (less than 15-20 per cent) in the company pledge 10 per cent or more.

SEEK THE PURPOSE !

"Promoters raise money by pledging shares to fund growth plans that should not deter investors.

"Many companies pledge shares to apply for shares under their rights issue, at a price same as other shareholders. This should give confidence to investors, said Dedhia.

But this comes with a warning. Many promoters also pledge because they lost money due to bad business decisions or speculative tradings. The funds were raised to make up for it.

"It shows the liquidity condition of promoters is not very healthy and investors may want to exit such counters," said Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities.

For retail investors, this bit of information is difficult to find.

If the company is pledging more shares with the financier because of the fall in share prices, there could be warning bells. Financiers keep the shares as collateral.

So, whenever the share price goes down, the promoter is either suppose to part pay the loan or pledge more shares. If the promoter cannot oblige, the lender can offload the shares in the market.