What is Pledging of Shares?

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What is Pledging of Shares?

In stock market, do you about “What is pledging of shares?”

I guess not accurately you guys will know about the pledging of shares.

No worries as in this article we will discuss in brief about the pledging of the shares.

And also about “Why the promoters pledges the shares?”

And we will also see the answer of the question whether it is good sign or bad sign of pledging the shares.

This becomes the important factor in the checklist for the investors to see while they are making the decision for making an investment in particular companies.

We will later on observe this in the brief on this article.

And I can bet that you will understand all the topics without any complications.

If in case, any complications arises also then don’t worry we are there to help you and to resolve your queries.

Let’s continue with the article,

First we will see about the definition of the pledging of the shares.

What is Pledging of Shares?

Pledging of the shares is nothing but it is one of the option for the promoters of the companies to use in order to secure loans that is required for the working capital, personal needs or for any acquisitions.

A promoter shareholding in the company is consider as the collateral to avail a loan in the future when it is needed.

When they pledge their shares of the company, the promoters retain their ownership.

You also that there is fluctuation in the share price and so on the value of the collateral also changes with that.

When the value of the shares pledged with any of the lender that falls below a certain level, then it triggers the “margin call”.

Now let us see in detail about,

Why Promoters need to pledge their shares?

As you know that promoters can also pledge their shares in order to fulfill the basic requirements for the company.

For raising the fund for the company to meet expectation it is better to do this process through the equity or by the debt.

This pledging of the shares is the last option that resides for the promoters to raise the fund.

These situations occurs when there is economic slowdown.

Now in the above, you know I had asked above that whether it is good or bad to do the pledging the shares.

Let’s see ahead,

If pledging of shares is risky for the shareholders?

While pledging of the shares, are not the good sign for the company and it also gets risky for the shareholders also.

During a bull market, the pledging of the shares might not create many issue as the market is moving upward and the investors are also positive minded at that phase.

But the real problem arises in the bear market.

In the bear market, the prices of the stock keeps volatizing and the value of the collateral keeps on changing as with the fluctuations in the share price.

However, the promoters are required to maintain the worth of the collateral.

In order to gap down the difference between the worth of the collateral, the promoters need to cover the value either by adding more cash or by adding more shares to the lender.

In this kind of worst case, if the promoters cannot fill the difference then the lender can also sell the pledged shares in the open market for recovering the money.

This collateral worth is agreed in the contract by both the lenders and the promoters.

Now let’s see how you can check them and where in the next step.

How to find the pledging of the stocks for the Indian Companies?

You can also found out this in any of the Indian Stock Exchange as the percentage of the total holding sharing shares that can be seen in many of the financial websites also.

The best source to find the correct report for pledging of the stocks of the Indian market is National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) website.

Now check out the steps for finding the pledging of the shares in the Indian Companies:

  1. Go to the NSE or BSE website.
  2. Then, search for the company you are looking for in the top search bar.
  3. After that click on the “shareholding pattern” click on the left sidebar of the company page.
  4. At there, open the latest Quarter report of the shareholding pattern.
  5. There you will find out the summary of the statement of the holding of the specified securities.

Conclusion

  • This is the main point to note, that pledging of the shares above 50% can be risky for the promoters.
  • You need to ignore that companies for the study purpose that have high pledging of shares so that, you can neglect the troubles in the future.

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