Don't sell off in a hurry, find out why the promoter has pledged shares

While pledging is usually a sign of financial distress, sometimes the promoter may be raising capital he can deploy for attractive returns

When the news of a company's promoter pledging his shares for the first time — or of him raising the level of pledged shares even higher — hits the market, investors usually perceive the news negatively. Experts suggest that they should investigate the reasons behind pledging before they react.

A recent report by Kotak Institutional Securities says the percentage of pledged promoter holding (as a percentage of total promoter shares) fell to 7.8 per cent in December from 8.3 per cent in September 2017 for BSE 500 stocks. Such reduction in pledged shareholding is positive news, as it signals improvement