Promoters of 440 companies pledged shares worth $10 billion

March 18th, 2009 - 12:22 pm ICT by IANS  

Ramalinga Raju By James Jose
New Delhi, March 18 (IANS) The decision by India’s markets watchdog to tighten the disclosure norms for the promoters of listed companies after the Rs.73-billion ($1.5-billion) Satyam Computer Services scam appears to have made an impact.

Promoters of as many as 440 companies have disclosed over the past two months that they had pledged shares worth a whopping Rs.50,474 crore (Rs.504.74 billion, or over $10 billion), says a new study.

Promoters of blue-chip companies belonging to groups such as the Tatas, Suzlon, Ispat and Jaiprakash pledged their shares with lenders after the new norms of the Securities and Exchange Board of India came into effect in January, says the study by leading brokerage SMC Capital.

In a sign that also indicates how hard it has been to find cash for new projects, four Tata group firms pledged their shares, with Tata Teleservices Maharashtra placing as much as 49.7 percent of its equity, as per the study made available to IANS.

“A lot of these pledges happened during the bull run,” said Jagannadham Thunuguntla, equity head with SMC Capital. “Promoters sought to take advantage of overpriced shares to raise fresh capital.”

The promoters of Ispat pledged 29.98 percent of their equity, followed by 25.85 percent by Suzlon Energy, 13.54 percent by Tata Steel and 11.14 by Tata Consultancy Services, the study said.

In terms of the money raised, Tata Consultancy Services topped the list with Rs.5,485 crore (Rs.54.85 billion), followed by Tata Power with Rs.2,506 crore (Rs.25.06 billion).

The promoters of United Spirits, led by Vijay Mallya - who is facing a tough time due to losses being suffered by Kingfisher Airlines - came in next with Rs.2,241 core (Rs.22.41 billion), followed by Tata Teleservices Maharashtra with Rs.2,178 crore (Rs.21.78 billion).

The study also showed that textiles was the top sector in which promoters of 44 companies pledged their shares, followed by 43 companies in metals and mining, 39 companies in technology, 31 companies in construction and realty, and 27 companies in pharma.

Lenders normally give only about 50 percent of the pledged shares’ value as loan because of the risky nature of the collateral. The bulk of the shares were pledged when the Indian stocks were ruling far higher than they are now.

The markets watchdog SEBI had tightened the disclosure norms for promoters on Jan 21 after it found some lapses during its probe into the Satyam Computer Services scam.

SEBI chairman C.B. Bhave had said the Satyam scandal - in which its founder and former chairman B. Ramalinga Raju admitted to inflating the company’s cash balances and profits over several years - would trigger a long-term system improvement.

“Whenever any such scandal happens, we need to look for long-term systemic improvements. Sometimes one can come up with quick solutions, like the one on disclosure of shares,” Bhave had said.

Reacting to the vast number of disclosures, Girish Vanvari, executive director for mergers and acquisitions with accounting firm KPMG, said the development was positive for corporate governance, but some issues could emerge as a matter of concern.

“But this is something to be worried about only in two cases,” Vanvari told IANS.

“First, when a promoter, who holds only 30 percent or so in a company, pledges say 20 percent of the stake and loses control of the company, since the lender redeems the shares for non-payment of the loan,” he said.

“Second, when the money raised by pledging shares is used for diversifying into rather unrelated businesses to capitalise on sector-specific booms. This again is a cause for worry and shareholders need to monitor this.”

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