Share pledge by promoters of commodity firms increase after pandemic

Data collated by BS Research Bureau shows Hindustan Zinc and Vedanta have topped the list of companies where the promoters' pledged stake is the highest as of June-end

While a large number of top-rated Indian companies are managing stress well, some are grappling with liquidity stress. This is because more than half of the shares held by the promoters, especially in the metals and mining sectors, were pledged in the June quarter with the lenders, an analysis by India Ratings shows.

“There are pockets of stress building up in 11 entities wherein 50 per cent or more shares held by the promoter or promoter group were pledged as of June quarter of financial year 2023. Liquidity is tagged as stretched/poor across rating agencies,” India Ratings said without disclosing the names of companies facing stress.

Between the first quarter of financial year 2020 (pre-pandemic) and June quarter this year, commodity companies have shown an increase in share pledges. Consumption and service-oriented companies reported a decline in pledged shares, the ratings firm said.

Data collated by BS Research Bureau shows Hindustan Zinc and Vedanta have topped the list of companies where the promoters' stake is either pledged or encumbered as on June-end. 

The firm said infrastructure, iron/steel and textiles are the sectors that lead the list. Here, most entities have seen more than half of the promoter shares being pledged with the lenders. The number of infrastructure companies are higher as many of them are under the debt resolution process.

“The steep rise in commodity prices, elongation of working capital cycles and higher operating cost could be a few reasons for companies in iron & steel and textiles raising funds through share pledge. However, similar to the infrastructure sector, there are entities in iron & steel and textiles that have undergone debt restructuring,” it said.

“We believe given the tightening liquidity conditions and higher cost of borrowings, corporates with a weak credit profile are likely to tap a loan-against-shares facility to meet their funding requirements. Additionally, the volatile condition of the equity market, especially price correction, is likely to create higher pledges to meet the minimum threshold requirements. Given the already high level of pledge in case of some entities/sectors, the vulnerability to liquidity mismatch is expected to aggravate,” said Sagar Desai, a senior analyst.