When a business needs money for day-to-day operations or expansion, it has numerous alternatives, including equity shares, corporate bonds, or approaching for a bank loan, among others. The corporation must present some form of collateral in order to obtain the loan. Typically, financial institutions and banks require businesses to pledge their promoter’s shares as collateral for a loan. This is a pledge of the promoter’s stock.
Typically, businesses choose this option when all other options for raising capital appear to be unfeasible. As a result, it’s a symptom that the company is under financial strain. While the promise of shares in a public business is regulated by SEBI, there are no such restrictions for unlisted corporates. It is sufficient to pass a board resolution.
While considering the impact of promoter pledging we can compare it with general loans. Promoter pledging cannot be termed as detrimental to the company in every case. It depends on case to case.
There’s nothing wrong with that, but it does indicate that you don’t have the means to spend upright and are willing to pay interest to get a loan to do so. If a company’s promoter’s shares have been pledged, it’s a warning sign that it’s in financial difficulty.
When a bank or financial institution offers a loan to a company with promoter’s shares as collateral, it usually does it in such a way that it may sell those shares and recoup its losses if the firm defaults.
Pledges of stock are prevalent practice in businesses. A tiny percentage of promoter-pledged shares might not raise red flags. However, if you discover that the firm in which you intend to invest has a significant percentage of the promoter’s shares pledged, you must weigh the dangers involved.
Conclusion –
If a company has a high amount of promoter pledging then it might lead to a stock price down move. Investors need to consider the amount and trend in promoter pledging. A decreasing trend is healthy for a company and vice versa. Considering this factor is very important when you go for investment in such companies.
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