These stocks have higher promoter pledge of as much as 100 per cent; stay cautious!

Here is the list of stocks where promoters pledged percentage is quite high

The Indian benchmark indices are in a state of flux and this is evident from the fact that the market goes up one day and falls the very next day. The state of flux is due to US Federal Reserve as the latter remains at the top of the mind for investors with the central bank’s policy due tonight! A 75 basis-point rate hike is largely expected but you never know what the actual announcement and commentary would turn out to be; hence, the markets are quite wavery right now.   

Overnight, the US 2/10-year yield curve had spiked to the highest since November of 2007, in anticipation of a Fed fund rate that could reach as high as 4.5 per cent early next year.   

Amidst all this, going ahead, investors need to be selective and cautious while picking stocks for investment purposes. This prompted us to explore and evaluate the risks associated with the stocks where the proportion of shares pledged by the promoters is high.   

Pledging of shares by promoters is not new to India. However, courtesy of Ramalinga Raju of Satyam Computers, the concept caught the attention of the investors. Before the Satyam disaster happened, there were no disclosure standards laid down by Securities & Exchange Board of India (SEBI) for promoters to reveal the proportion of their pledged shares. Be that as it may, post the Satyam fiasco, disclosure regarding the pledging of shares by promoters of the company was made mandatory by SEBI.   

Why do promoters go for the pledging of shares? 
More often than not, the promoters go for pledging part of their shares only after exploring alternate sources for raising funds. Share pledging is the last resort–akin to a person mortgaging his house or personal assets for money.   

Concerns with pledging of shares by promoters:  The pledging of shares by promoters could pose a factor of concern in both the falling as well as in rising market scenarios when large-scale pledging of promoter equity could create issues for retail investors’ wealth. The amount of risk that companies run by pledging shares are different for small and Mid-Cap companies than it is for Large-Caps. The betas are far higher in the case of small companies because if the market corrects, the stocks of such companies plummet, resulting in financial institutions selling these shares and putting further pressure on the stocks.  

The line of 50 per cent suggests caution: Stocks, where the promoters' pledged shares are more than 50 per cent, are viewed as risky investment bets.     

Here is the list of stocks where promoters pledged percentage is quite high: 

Past track record: If a promoter has been heedless in the past when it came to raising assets for careless development, there is no point in believing that he will not be foolhardy this time around. Hence, just avoid such stocks! 

Do you own any of the above-mentioned stocks? If yes, what’s the rationale you think for a high promoter pledge?