Rise in share pledges amid market decline

Infra and materials among sectors with highest pledges; companies with high stock pledges a red flag for Blackrock

Share pledges by Indian companies' founders are seen rising from a record as equity declines deepen and surging bad loans make banks reluctant to lend to the most indebted businesses.

Infrastructure companies and materials producers drove the value of the shares placed as collateral to Rs 1.95 lakh crore ($30 billion) in the quarter ended June, according to Edelweiss Securities. That's 1.85 per cent of the total market value of Rs 105.3 lakh crore. Fitch Ratings' local unit says the financiers holding them risk losses because the pledged quantity exceeds the average daily volume in a third of the 917 companies tracked by the agency.

Shareholder value will get further eroded as founders will have less economic stake in company," said Deep Narayan Mukherjee, a Mumbai-based senior director at India Ratings and Research Pvt, a local unit of Fitch. "Some of them are forced to pledge as they aren't able to raise credit. Some companies are also getting hurt due to high interest rates."

Founders of companies including Alok Industries, Bajaj Hindusthan and Essar Ports have pledged more than 99 per cent of their holdings as collateral to borrow funds. That is a red flag for BlackRock Inc. Speculation investors are exiting firms with high pledges had in 2013 sparked a selloff in at least a dozen stocks in the S&P BSE500 Index.

"One should keep a close eye and avoid companies where there's excessive pledging," Anup Maheshwari, head of equities and corporate strategy at DSP BlackRock Investment Managers Pvt, which has $5.8 billion in Indian shares, said in an interview. "Investors should be careful."

Representatives for Alok, Bajaj Hindusthan and Essar Ports didn't immediately respond to calls or e-mails seeking comments.

CHART 1. Stressed assets made up 11.1 per cent of loans in the nation's banking system as of March 31, the highest since 2002, data from the central bank show. Edelweiss Asset Reconstruction Co, the biggest buyer of bad loans from local banks, sees more pain as State Bank of India and Bank of Baroda, the top two by assets, reported wider bad-debt ratios in the June quarter.

CHART 2. While the Reserve Bank of India has cut interest rates three times in 2015, borrowing costs in Asia's third- largest economy are among the highest in the region. Banks, seeking to shield profit margins amid worsening asset quality, have been slow in passing on the lower financing costs.

CHART 3. Pledges by owners of industrial companies climbed to Rs 42,600 crore at the end of June. Those running material makers reached Rs 33,000 crore.

HDFC Securities, a unit of India's most-valuable lender, says founders pledging large chunks of their holdings risk losing control of their companies should a drop in equity prices erode the value of collaterals. The S&P BSE AllCap index of 728 Indian companies shares has slumped 9.4 per cent from this year's high in March.