Simple definition of?'Pledging of Shares'?means taking loans against the share the one holds.
What is Promoter Pledging ?
- Just like an individual take loan from banks, when promotors are in need of money, they pledge their equity shares with financial institutions, banks as a collateral to get loans. Promoters may then use this money to fund new ventures, carry out acquisitions or even meet personal requirements.?
- In general, raising funds by pledging shares is a last resort promoter takes when none other options to avail loans are available to them.
- Pledging of shares is common in those companies where the promoter holding is high.
What are the Implications to Retail Investors ?
- When promoters pledge their shares in buoyant market environment it hardly creates any issues. However, in the event of slowdown in economy it has negative implications.
- When stock price goes down, so does the value of collateral. In that scenario, promoters has to make up for the shortfall by either paying for the difference which is unlikely due to bad business environment or pledging more shares.
- Lenders can even sell the pledged shares in the open market to recover their money. In past several companies like Zee, AGAG group companies, Future Consumer Limited, Satyam are some of the examples when stock price plunged severely when lenders decided to sell stocks in open market.
