Letter to BS: Rise in pledged shares by promoters puts Street on the edge

This refers to your article “Promoters' pledged share up 60%” (February 19). Pledging of shares is risky as share values are prone to market risks. Share appropriation as security for loans up to an average of 60 per cent will result in weak capital investment for promoters due to fluctuating share markets. There may be an abrupt fall in the value of shares in the stock market due to which their appropriation as security may be below par and even in some cases worthless. It, in the process, leads to capital erosion. Pledging of shares may appear to be an easy way of realising quick market returns but trading in this area should be minimal. 

Its impact on capital outflow and resultant fall in net asset value in adverse market conditions will thus harm all investors — be it share or debenture holders. This happens all the more when the gap between the promoter’s listed wealth and the promoter’s personal wealth is too narrow for investor comfort. The minority shareholder will be the worst affected. Hence, a reduction in the percentage for pledging in shares is essential to ensure a strong capital base for smooth conduct of business. A high percentage of investment in shares will also lead to desperate management decisions for immediate market survival than efficient business planning.
 

C Gopinath Nair Kochi


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