18 Mar, 2025
4 mins read
Pledging of shares is a common financial practice in the stock market. Company promoters or major shareholders often use this method to raise funds. While it can help access capital, it comes with risks that affect both the company and its investors. In this article, we will explore what share pledging means, how it works, and why it matters to you as an investor.
When shareholders pledge shares, they use their stocks as collateral to secure loans from financial institutions. The shareholder (pledgor) keeps ownership of the shares, including voting rights and dividends. This arrangement lets them access capital without giving up their stake in the company. However, if they fail to repay the loan, the lender (pledgee) can sell these pledged shares to recover their money.
Pledging of shares is not restricted just to the promoters of the company, shares can be pledged by smaller investors like you and me. You could also pledge your existing shares with your broker to get additional funds for trading/investing. The steps involved in pledging shares are as below-
The process involves below key steps:
The shareholder must have a Demat account with shares in electronic form.
The investor agrees to pledge their shares with a broker or a financial institution for an agreed amount.
They sign a pledge agreement that outlines terms like interest rates and repayment schedules. The pledged shares are then transferred to the lender's Demat account.
The lender creates a lien on these shares, giving them the right to sell if the borrower defaults. However, the ownership of the shares remains with the investor. He/she will continue to get benefits from the shares like dividends, voting rights, etc.
The investor receives the pre-agreed amount of the loan.
Once the investor pays back the loan, the lien on the shares is released.
For example, if a promoter owns 60% of a company worth ₹300 crore and needs ₹100 crore for expansion, they can pledge part of their holdings as collateral rather than selling them.
Promoters and major shareholders pledge shares for various reasons. Many use the funds for business expansion, launching new projects, or increasing operational capacity. Others might need money to repay existing debts. Sometimes, promoters require funds for personal financial needs.
While pledging can be wise when used properly, too much reliance on it might signal financial troubles or poor cash management. As an investor, you should pay attention to why a company's promoters are pledging their shares.
Share pledging carries significant risks that you should understand. If stock prices drop significantly, lenders may demand additional collateral, known as a margin call. If promoters can't meet this demand, lenders might sell the pledged shares, pushing prices down further.
Excessive pledging can also dilute promoters' control over their companies. If lenders sell large portions of pledged shares, promoters lose voting power and influence. This change in control structure can affect the company's direction.
Many investors view high levels of pledged shares as a warning sign. It often suggests financial instability, which can reduce investor confidence and cause stock prices to fall.
When company promoters pledge their shares, it can impact your investments in several ways.
If the funds raised through pledging help the business grow, it can increase shareholder value.
If promoters default on loans and lenders sell pledged shares, stock prices may go down.
High levels of pledged shares often indicate financial stress and could erode your confidence in the company.
Before investing in companies with high pledged shares, you should carefully analyze their financial health and future prospects.
In India, regulatory frameworks help protect shareholders from the risks of pledging. SEBI requires companies to disclose pledged shares under its Substantial Acquisition of Shares and Takeovers Regulations. Promoters cannot pledge more than 30% of their holdings without specific approvals.
The RBI also restricts banks from accepting excessive promoter holdings as collateral. These regulations aim to ensure transparency and prevent misuse of share pledges.
The impact of share pledging depends on how responsibly it's managed. When used judiciously for productive purposes like business expansion or debt restructuring, it can benefit the company and its shareholders.
However, excessive pledging often signals poor financial health or creates default risks that could harm your investments. As an investor, you should evaluate companies with pledged shares by analyzing their financial stability and growth prospects.
Pledging of shares is a double-edged sword that can impact both companies and investors. While it provides companies with quick access to capital, excessive pledging can signal financial distress and lead to increased stock volatility. Investors should carefully assess a company’s pledged share percentage, financial health, and management decisions before making investment choices. Staying informed and conducting due diligence can help mitigate risks and make better investment decisions in the stock market.
Share pledging is when someone uses their stocks as collateral to get a loan, similar to how you might use property to secure a mortgage. This lets them borrow money without having to sell their shares.
Company promoters (founders or major shareholders) pledge shares when they need extra cash for business growth, daily operations, paying off debts, or personal needs. This way, they can access funds while keeping ownership and control of their company.
Calculate your Net P&L after deducting all the charges like Tax, Brokerage, etc.
Find your required margin.
Calculate the average price you paid for a stock and determine your total cost.
Estimate your investment growth. Calculate potential returns on one-time investments.
Forecast your investment returns. Understand potential growth with regular contributions.
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