Share Pledge by Promoters – Examples of Stock Taken to Ride – Part 2

6 mins read
by Angel One

In our preceding blog we had explained the share pledge meaning, what promoters share pledge is and how it affects the retail or minority shareholders. We discussed in detail where to find the data about shares pledged and how to analyze it further. In this Blog we are providing an example of how the Stock of Akruti City (Now renamed as Hub Town) was taken for a ride. Let’s understand it in detail.

This issue happened in 2009 when Akruti City was in the F&O list. It was a very difficult period for real Estate companies as after the 2008 melt down the realty companies were debt laden. With most of the realty companies opting for further debt (with already debt laden status), many promoters had started to exit the non-core assets or opted pledging of shares. Akruti City promoters had also pledged 70 lakh shares with Barclays. The pledge was taken in FY08 for a total amount of Rs 140 crore. The trigger price was set at Rs 610. In simple terms any trade below the trigger price would have resulted in additional shares being pledged or the selling being done by Barclays.  When we explained the share pledge meaning in our preceding blog – we had also explained what part lending institution plays.

And on January 13, 2009 stock price traded at Rs 601-602. This resulted in the trigger price being initiated. As a result a 7 day notice was given to promoters either to pay up additional shares for pledging. However another 15.50 lakh shares were pledged With India Bulls. No Wonder there was no additional security left for promoters to add further. As a result it was expected that lending institutions would start selling in the open market. This news came to the notice of a bear cartel and considering the scenario with inability to provide any additional security – they (4 institutions) shorted the shares in the F&O segment.

Just to quantify in numbers, around 11 lakh shares were shorted on January 14th and 15th 2009. With the total market wide limit at 13 lakh shares.  This means the market wide limit was almost hit. However, the way the bear cartel was active even the opposite camp had its ammo full. And the lending institution provided a breather to the company.  With this much shares already shorted there was contra view made and the January series ended at Rs 880. With shorting at Rs 650 and the February series trading at Rs 780 the bear cartel opted to roll over the contract. This means Rs 100 per share of loss was incurred on this trade. (January Series Rs 880 and February Series was Rs 780). The total loss was Rs 150 per share.

This would have provided some time to the Bear cartel and inability of the promoters to repay or provide additional security would eventually result in stock price tumbling next month. However the worst was yet to come.

With the opposition camp taking the price for February Series to Rs 1050 and March series trading at Rs 900 the share price was increasing further. The gap that was Rs 100 in the previous series, increased to Rs 150. (Rs 1050 – Rs 900)

The promoters got another round of breather as Barclays provided more time for repayment. And as a result the stock managed to hold the upward trajectory in the month of February as well. As mentioned earlier the February series closed at Rs 1050 and March was trading at Rs 900.

The same scenario lasted in the month March 2009. And now the March series was trading at Rs 2250 and April was trading at Rs 1785. So the difference was now Rs 465 over the current month and near month. Usually it is the base or the spot price drives the derivative price. However here in this case the scenario was different – derivative price was driving the spot prices.

Just to put the things in perspective, Why spot price was not getting derived is, On 18 March- 2009, around 1.97 lakh shares were marked for delivery on BSE (out of 42.88 lakh shares traded) and 3.12 lakh shares on NSE (out of 61.60 lakh traded). Insiders say that as the floating stock is about 5 lakh shares with the public (out of total public float of 67 lakh shares) all of this is practically cornered by the informed circles, thus increasing problems for the bear cartel. Of this 5 lakh, 1 lakh shares are of inside circles having traded amongst them for tax planning. Insiders also stated that these 4 lakh shares , even if were acquired at an average of Rs.2,000 per share, would have cost Rs.80 crore, which is less than the profit made by the insiders, as a mark to market profit ,on open interest of F&O, which was estimated at Rs.200 crore.

Had Bear cartel not rolled over the positions for the month of April 2009, it would have put an end. Just that Bear would have booked hefty losses to the tune of Rs 181.50 to Rs 200 crore. Else the price would have even touched Rs 3000 as well.

With the stock price moving to Rs 2300 in just two months it was time for SEBI to intervene. And eventually SEBI cancelled all the contracts for April 2009. And fortunately or unfortunately the story came to an end. With the F&O contracts being cancelled the stock price eventually came down to real levels. Akruti stock price declined more than 50 percent to close at Rs 819 on BSE and Rs 999.45 on NSE.

So this was the combination of Pledging of shares and insider trading happening at one go. However it results in high volatility and hence it is better to avoid such kind of investment as Risk reward is not favourable.

Revocation of Pledge

Hope the readers understood the important factors affecting the stock price on the back of shares pledge by promoters. But along with this one should understand the importance of revocation of pledge. Revocation in Simple terms means – promoters paying back to the lending institution and taking back the pledged shares. Revocation of the pledge is considered positive as this indicates towards the better financial performance of the Company. As the cash flow starts promoters pay back and revoke the pledge.

Important factors to notice are – try to avoid investing in companies where the pledged shares are higher as a part of promoters holding. Smaller pledge for personal usage is not a bad factor.