#Thread

#PledgeShares - Is it really that bad as being made out ?

There is so much fuss about #AsianPaints additional Pledged share.

#TCS do have some pledge.

Lets understand, it's Pros & Cons.

How some companies take its advantage while others fail miserably?

1n

Pledging means Promoter use some of their shares as collateral for loans from Banks/NBFCs.
This is Pledge Creation.

Why do they pledge?

Pledge shares act as collateral hence it is Secured loan with INTEREST RATE LOWER than Unsecured loan thus saving money on interest.

2n

What is bank's benefit ?

Bank get collateral which lowers their risk (than unsecured loan) so if company fails to pay or any adverse situation arises, banks can sell the shares & recover money.

Margin -> Loan amount lent < Market price of shares pledged & act as security.

3n

When can bank sell pledged shares ?

There is contract signed between promoters & bank, their is a price/value agreed. If stock price falls closer to that value banks can sell.

4n

Do they Bank always sell shares if it falls closer to agreed price ?

There are other options too Banks can demand Cash or more shares from the promoters. If promoters can't provide either than lenders sell.

And that is completely fair.

5n

When the process looks so smooth then what is the problem for retail investors?

When Bank sells in market there is sudden supply of shares (which are already low priced). This supply leads to further fall and retail investors have to sell their shares at significant loss.

6n

Any other Point Retail Investors should consider ?

Please check the PURPOSE of pledged shares if its business (for company) or Personal.

SHOCKED ? Yes it's promoters own shares so they can pledge it for personal needs too.

Will you invest in such company ? Think twice.

7n

When promoters pay of loan & interest as per agreed contract they get back their shares.

This is called Pledge Revocation.

This is considered as +ive sign.

8n

Any caution ?

Just beware of companies & promoters who frequently create & revoke pledge shares.

In general Companies with Promoters having higher pledge have very high volatility in share prices.

Some of them are darlings of Operators too.

9n

Any Questions so far?

I have one, what happens to Dividends of pledged shares?

As far as I know since borrowers still maintain the ownership of pledged shares the dividend belongs to them.
So promoters get the dividend on their pledged shares. Isn't it so nice & relieving?

10n

So how much pledge is OK & when it is RISKY for retail investors ?

Typically >50% pledge is considered risky & retail investors should avoid it.

But I am risk averse investor. If I have 5000 companies to chose from why would I take such risk. My limit is 15%.

11n

Overall Conclusion -

If Stock has big brands, strong balance sheet, good corporate governance, reputable Management they can easily save money on interest by pledging some shares. Banks have less risk & they would be happy to lend.
If these qualities are absent STAY AWAY !!

12n

#AsianPaints Additional Pledge Fuss !
It had 11.87% promoters shares already pledged.

With Additional Pledged it is now 12.28%
Yes this is what 20.78 lakh promoters share means(just 0.41% more)

Messages/Tweets circulating are highlighting only No. of shares (meaningless)

13n

Now ask yourself some questions ?

Is Asian Paints a strong brand with good balance sheet & Reputable management ?

Can they survive ?
I will support the answer with some financial data. They came on TV & declared that we will fully pay employees during lock-down.

14n

In-fact they did pay. I have 3 Asian paints employees as Tenants at my native. They got paid & one of them paid us advance rent.

Without good balance sheet it's very hard to do such thing. Also such actions speaks volume about credibility of management.

15n

Lets do some Data crunching !

See Asian Paints & Peer Comparison.

I compared Cash Debt (including Contingent Liabilities) with their respective market cap. Lower the better. Asian paints (-0.06%) is best among its peers. D/E (including Contingent liabilities (0.05).

16n

Lets imagine an Apocalypse in Paint industry & need to chose one company to survive, leaning from above data & thread, what would you chose?

Beware of Extra Smart guys & their innocent/blind followers, who convey half baked Info to bring prices favorable for their trades.

17n