Infrastructure companies have seen a significant increase in the shares pledged by promoters. Over the last eight quarters ending September 2012, the aggregate shareholding of promoters of 12 infrastructure companies that were under pledge has gone up by an average 99 per cent. Even if one compares it with the previous quarter, i.e. June 2012, the same is up 13 per cent. Experts believe that lack of funds and need for working capital and fresh equity infusion in on-going projects has pushed many promoters to pledge more shares. Notably, they don’t see the situation improving over the next 1-2 quarters.
Companies like GMR, Jaypee Infra, Gammon Infra, Gammon India and NCC are among the top in the list. "It is mostly the infrastructure companies because most of the projects that they execute are of the long gestation and many of them are related to the power sector. If there is no coal and if PPAs (power purchase agreements) are not signed what could a company do. Let’s say in the case of GMR and GVK, if there is no gas available, the power projects are going to suffer and thus add to the issues on financials of the companies and the liquidity,” says Sonam Udasi, head of research, IDBI Capital.
| Pledged shares as %age of promoters' stake | |||
| Sept 2010 | Sept 2012 | % change | |
| Era Infra Engg | 76.40 | 77.80 | 1.83 |
| NCC | 13.75 | 62.13 | 351.85 |
| Gayatri Projects | 91.93 | 49.63 | -46.01 |
| Marg | 23.31 | 58.57 | 151.27 |
| C&C Co | 46.33 | 52.62 | 20..52 |
| ARSS Infra | 0.15 | 17.64 | 11660.00 |
| GMR Infra | 17.29 | 28.36 | 64.03 |
| Jaypee Infratex | 54.14 | 67.29 | 24.29 |
| Gammon Infra | 0.00 | 77.29 | NA |
| Gammon India | 0.00 | 51.32 | NA |
| Supreme Infra | 0.00 | 39.03 | NA |
| Atlanta | 11.90 | 79.95 | 571.85 |
| Source: BS Research | |||
The companies, which are shown in the list, on an average had 27.7 per cent of the promoters’ holding pledged as at end of September 2010. This figure has almost doubled to 55.1 per cent at the end of September 2012 quarter. “It looks like it could take one or two more quarters before the issue of pledging in the infrastructure space could ease out because at this juncture raising debt or equity is difficult,” adds Udasi.
Infrastructure companies, which require huge capex for the ongoing projects, have suffered in the past due to lack of funding at a time when the need for working capital and equity shot up. To deal with the situation, most of the promoters resorted to pledging part of their holding. This was largely driven by risk-averse banks emphasising on security so that their interest is protected (to avoid default by borrowers) during any downturn in the industry.
But, as economic growth slowed and liquidity tightened, investors too turned risk-averse shunning companies that were high on debt or needed huge funds to grow. Not surprisingly, in many cases the shares are trading significantly lower compared to the prices at which the shares were initially pledged. One such case is ARSS Infrastructure, whose share price was trading at over Rs 1,300 in September 2010 when the promoters initially pledged the share (then only 0.15 per cent of the promoter’s holding was pledged). Thereafter, the percentage of promoter holding under pledge rose to almost 77 per cent in June 2011 quarter.
Since then, the promoters’ stake has also fallen from about 55 per cent in June 2011 to 22.9 per cent in September 2012 quarter. In many cases, including ARSS, the bankers and lenders have invoked and sold the pledged shares in the market, which has led to a fall in promoters’ stake in the respective company. Today, the share price of ARSS is hovering around Rs 50, down 96 per cent from September 2010 levels.
Banks and lenders typically sell the pledged shares when promoters do not provide additional shares or security, thereby leading to a fall in share prices. This is a painful exercise, which has led to debacle for many companies and promoters in the past, which investors need to monitor. "Investors do not give much attention to the pledging, but that could be a very dangerous risk to take. There are many companies which have been hurt due to the promoters pledging their shares. We all know the names like Unitech, Kingfisher Airlines, OnMobile and companies like Great Offshore, which was sold due to pledging of shares. In this process, investors got hit," says Vivek Mahajan, head of research, Aditya Birla Money.
Thus, experts say investors should be careful given the fact that any selling of pledged shares of companies, which have large proportion of promoters holding pledged, could prove painful. Experts, however, believe that investors should give attention to the quantum of shares under pledge because a smaller proportion with the intention of a guarantee may not have a material impact. Investors should also look at the debt levels in the company in correspondence with the rise in pledging, which could give a fair idea about the investment risk.
