What is a pledged share?
Loan against the shares one holds. It can be done by both investors and promoters.
What is Pledging of Shares?
As such there is nothing to worry. After few years that loan is Repaid and papers of that property is released.
This is an alternate form of raising the funds. To raise funds for the expansion of the company is good. On the other hand, if the funds are raised to provide an exit route to the promoters/investors then it is a bad sign for retail investors.
The “pledging of shares” activity increases when the stock market/stock price is on upmove or Near the peak. The promoters can get a higher loan.
Assuming, a stock market operators /broker is willing to offer 80% of the stock price as a loan. Balance 25% will be his returns or hedge against risk. When the stock price is Rs 100, the promoter will get Rs.75 as a loan but if the stock price is Rs.200 then promoter will get a loan of Rs.150.
If stock prices goes below 75 or 150 Than promotor have to pledge extra shares to lender to maintain the hedge against Risk.
Recently in last 6 to 12 months we have seen stocks where Promotors have pledged there Holding are beaten down & Investors have lost huge Wealth.
Stock where Promotors have pledged huge percentage markets have punished those stocks and we have seen prices cracking.
Few such stocks are Videocon Inds,Fortis,GMR Infra,JP Associates Ltd,Gati,InfiBeam etc.
All above stocks were traders favourites Stock as they give volatility.Many were recommended by News channel as Hot Picks for Trading.But at last what happened Small investors Lost heavily
Case Study :
Stocks Name – Sterlite Tech.
Promotor Holding – 54%
Holding of Promotors pledged – 96% Approx.
Cmp – 385
52week High/Low – 415/253
Market cap – 15470cr
Current P/E – 32
Industry P/E – 16-20.
Book Value – 30
Face Value – 2
Price To Book – 12
D/E ( Debt To Equity) – 0.7 FY18.
Company has strong order Book -9450cr.
Valuation – Expensive Vs Peers.
Stocks can see Upmove in short term But any negative news can drag stock drastically And we see Limited upside from current levels in next few quarters.
Although Strong Promoter Group and Good Order book due to Digital India Drive , It should be noted that MCAP is very High And should not be For Long term Investing as there is huge Interest of Positional Traders .
This type of stock should be only for Trading Purpose or short term Investment.Long term Investment should be Avoided.
Disclaimer – All views are personal.Above Report & Data for Educational & Study purose only.Do Due diligence before acting.Consult your financial advisor before taking any position.