Promoters invent ways to hide pledged shares
In this issue:
» India has 12th highest number of HNIs
» Oil prices dip on biggest inventory release
» Is the original Silk Route re-emerging?
» Will the G20 be successful in tackling high food prices?
» ...and more!
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Since then investors have been quite wary of putting their money in stocks which have a significant portion of pledged promoter shares. At a time when the RBI has been raising interest rates, the likelihood of promoters not being able to fulfill their financial commitments is a matter of concern. Not just that, even if the prices of such stocks fall below a certain level, the pledge shares could trigger a sell-off from financiers. As a result, such stocks are facing a lot of pressure and have in recent times underperformed the broad Indian stock markets.
But the story is far from over. To escape the ire of investors, promoters are now increasingly resorting to novel ways to avoid the regulation that makes it mandatory for them to disclose the number of shares pledged with lenders. Official data from the stock exchanges suggests that promoters of more than 800 listed companies have pledged shares worth more than Rs 1.5 trillion. But the size of the leverage could actually be much bigger if you consider the ones that go unreported. One easy way how promoters escape disclosure is by transferring some of the promoter shares to a special purpose vehicle (SPV) which is directly or indirectly controlled by them and to raise money against those shares.
It is both amusing and scary that clever businessmen always find ways to take advantage of loopholes in the system. By the time the regulator comes around to fix this, they would find other avenues. The cat-and-mouse game will go on forever. That is why we believe the promoter's integrity should be well assessed. A clean and shareholder-friendly past track record would be a fair proxy of the same.
Do you think a high portion of pledged shares is a threat to the stock price? Share your comments with us or post your views on our Facebook page.
01:17 | Chart of the day | |
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Critics of the US President have argued that the SPR is meant for emergency only and they could see hardly any on the horizon. Hence, they believe that reserves have been released to appease the American public and gain the resultant political mileage out of it. The US Government has however maintained that the decision has been taken to make up for the reduced supply of crude from the Libyan crisis. Either way, we are happy that this has brought some relief to crude prices. If prices stay low for long, it will certainly help India in its quest to lower inflation. Long term though, crude prices seem to be headed only one way and which is up.
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Lately, the emerging market's growth model was dependent on exports to developed nations. But now, America is seeing its global clout waning and Europe is in a severe debt crisis. The US is currently China's largest trading partner. However, according to a report by HSBC, in two decades, India, Brazil or Russia are likely to be the main destinations for Chinese exports. A sea change in world dominance is on its way and it may go back centuries. The dollar's dominance as a reserve currency will gradually fall. China is now investing heavily to protect raw material and energy supplies from Africa, Middle East and Latin America. The dragon nation is expected to be the top economy by 2050 and India 3rd on the list.
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Little wonder then that the G20 farm ministers met and settled a deal this week aimed at tackling high food prices. The plan includes among many other things increasing agricultural output and improving market transparency through a new database. Removing export restrictions for food aid is also part of the agenda. While there were proposals to regulate commodity derivatives mainly from France, most of the members seemed against the idea. At the end of the day however, ensuring sufficient food for its citizens is the responsibility of the government of every nation. What each government chooses to do to bolster agricultural output is the crucial part that will determine the direction in which food prices head.
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04:50 | Todays' investing mantra |
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6 Responses to "Promoters invent ways to hide pledged shares"
shome suvra
Jun 25, 2011Keeping shares in the demat accounts and having negative lien on it is another way of evading disclosures.The fall in value of shares by a certain amount require margin calls.High debt-service coverage ratio, low cash break-even,high return on equity are some of the conditions to be put forward by the lenders.
tony fernandes
Jun 25, 2011Hi. I believe that the Rs 5 Lac bar, for exemption from filing IT returns, is with reference to salary income only.
Kindly clarify this, to avoid problems, for non-salaried assessees.
Many thanks.....tony
sunilkumar tejwani
Jun 24, 2011yes of course, pledged shares with financiers is always a big threat to the integrity of the market as well as share price. The moment financier gets whiff of some turbulence in the stock price, he will happily dump to protect his interest. A lay investor should always be on guard & not invest in such companies, whose promoters have pledged their shareholdings.Also the financiers have first hand information about the financial position of the company, which gives them unfair advantage over other common investors.
Pradeep
Jun 24, 2011Apart from the integrity of the promoters, we also need to look at the fact that the Regulator has to be proactive and anticipate these kind of moves by the regulated. Why did'nt the SEBI issue the directive saying that shares pledged includes those which may have been pledged using SPV's. As a REgulator, SEBI is fully aware that the SPV's are common route adopted in recent times. SEBI regulations are all knee jerk reaction and reactive to a particular situation without a forethought of the possible outcomes.
Dileep K Gupte
Jun 24, 2011Unless the business integrity and competence of the promoters to run that business has been proved over a period, pledged shares, directly or indirectly through SPVs should raise eyebrows.This matter should also be highlighted by stat auditors, and satisfactory explanation about use of these funds by promoters should be given to them.
vkshah
Jun 27, 2011It is very strange that laws are strictly enforced in other develped countries - they even do not spare the celebrities if they commit an offence.
In the say, I doubt whatever strict laws are enacted, it is a will which plays an important role for implementation.
I apprehend about our success for any law