Many lenders appear to have advanced capital against shares that are now suspended, leaving them with no ability to encash their collateral. Latest exchange data show that there are 743 suspended companies, and 217 firms have some amount of pledged shares, with a value of Rs 602.63 crore.
A senior executive with a financial services group that has a lending division said suspended companies are a problem as collateral, since exit becomes extremely difficult. “You have ownership over the shares but you can’t sell...” said the person.
An executive director at another brokerage that also has a lending arm said that the fall is rarely sudden. Companies have recurrent problems that keep surfacing before the final suspension in trading. These act as signals for many lenders to liquidate stock, though some inventory might remain unsold.“Most of the time they would have sold off,” said the second person. He added that lenders typically ask for more collateral when companies appear to be in trouble. This can be in the form of hard assets like real estate or promissory notes, according to those in the business.
Alok C Churiwala, managing director at domestic brokerage firm Churiwala Securities, said lenders would have been aware of the risk and entered into the transaction accordingly. “In many cases people who are lending, they may have lent.. (on)...very aggressive terms,” he said.
A sectoral analysis reveals that the iron and steel sector (including intermediate products) has the highest value of pledged shares in suspended companies, accounting for Rs 168.4 crore. Others in the top five include auto tyres and rubber products, restaurants, realty, and textiles.
A suspended company is one in which shares can no longer be bought or sold on the stock exchange. The exchange typically suspends a company when it fails to comply with the listing requirements. Such firms can move out of suspension by meeting the requirements, and paying necessary fees, according to a note on the exchange website.
Data show that promoters in over 2,903 companies have pledged shares. There are 3,947 listed equity companies available for trade. Promoters sometimes raise money by giving some part of their holding as collateral to lenders. The total value of such pledged holdings is over Rs 1.85 trillion, data show.
Pledging tends to rise during periods of economic stress. The Covid-19 pandemic has affected many companies. Access to capital has become a challenge for many, according to a July 29 India Equity Research report from brokerage firm Edelweiss Securities. Lenders are more careful on lending, noted analysts Aditya Narain, Prateek Parekh and Padmavati Udecha.
“While governments, guarantees and moratorium are targeted at mitigating this natural challenge, with some success, we do believe the access to credit will stay narrow beyond the near term. This is a medium-term challenge. It has sharpened the differences in capital access for individuals and businesses,” it said.