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Tuesday, December 11, 2012

Cos With High Pledged Stake to Face F&O Ban


Cash-strapped promoters who have pledged a substantial part of their holdings with lenders may be squeezed further as the Securities and Exchange Board of India, or Sebi, is planning to keep their company stocks out of the equity derivatives segment to check a steep slide in share prices. 
What has prompted the regulator to consider such a measure are rising instances of stocks plunging as much as 50% within days of financiers offloading shares of promoters who failed to pay margin money at a time liquidity is tight, said a person familiar with 
the development. 
The proposed measure will hit companies whose promoters are highly leveraged and lead to stocks of such companies being excluded from the futures and options (F&O) segment, the person said. 
The proposal comes at a time the level of pledged shares by promoters 
is at a four-quarter high with the total value of pledge close to . 1.4 trillion. 
In a recent meeting convened by Sebi with stock exchange officials and market intermediaries such as stock brokers, concerns were raised over rising instances of speculative trading in certain counters in the derivatives segment where a large part of promoter holding is pledged with financiers. 
Cutoff Limit for Curbs Yet to be Decided 
"Whenever the financier unloads the stock, it results in a very high percentage fall because there is no circuit filter in the F&O segment. Many traders and speculators also join the party by shorting the stock heavily, creating further panic. Some checks and balances are being considered to prevent excessive speculation in these counters," said the person who declined to be named as he is not authorised to speak to the media on this. While the extent of pledges shares that will be considered for exclusion from the F&O segment is yet to be decided, it could be in excess of 35-40% of the promoter holding. For instance, if the promoter controls 50% in a company and has pledged over 35% of his holding, the stock will be considered ineligible for the derivatives segment. This proposed rule will be over and above the existing requirements for inclusion in the derivatives segment. 
Of the 150-odd stocks in the derivatives segment, the promoters of close to one-third of the companies have pledged at least part of their shareholding. Of this, promoters of over 20 companies have pledged more than 20% of their total promoter holdings. Promoters of companies such HDIL, Suzlon and United Spirits have pledged more than 90% of their holding, according to the ETIG database. 
"If the company is also part of the index, it may be tricky to work out a solution. Further, the duration of frequency of exclusion and inclusion also needs to be discussed," said a stock broker. According to Morgan Stanley, the level of pledged shares by promoters for the quarter ended September is at a four-quarter high. "The pledged value as a percentage of the market cap of stocks of these companies rose to its highest level in four quarters. At the end of September 12, the total value of pledged stocks was $27 billion, up 16% q-o-q. In rupee terms, the total pledged value was Rs 1.42 trillion, up 10% qo-q. Of the 790 companies that have reported 
pledging, promoters of 254 companies have pledged more than 50% of their holdings," it said in a research report dated November 26. Many promoters are uncomfortable with their share-pledge details being put in the public domain due to the stigma attached to such information and the attention they draw from short-sellers. To keep such borrowings away from the market glare, they often park a slice of this holding — which is used to borrow — into a separate demat account through cleverly-worked-out structures. 
In 2011, Sebi tightened the disclosure norms by widening the disclosure requirements by replacing the term 'pledge' with 'encumbrance', which includes pledge. 
The disclosure pertaining to pledging of shares was introduced by Sebi after the Satyam accounting scandal, when it was revealed that the Raju family — the promoters of the IT firm — pledged a large portion of their shares with lenders without any information available in the public domain. 
Promoters of over 250 companies have pledged more than 50% of their holdings with financiers. Analysts say the true level of leverage in the market could be far higher since a chunk of the borrowing goes unreported. 
The latest move is expected to curb excessive speculation in the F&O counters. Over the last few years, there have been several incidents of speculation in companies having presence in the derivative segment with high promoter holding pledged with financiers. According to brokers, when the stock is part of the derivative segment, it becomes easier for the bear cartel to hammer the stock as they can take huge short positions before the financier offloads the shares in the market. Sebi has also been tightening the norms that govern the inclusion of a stock in the derivative segment. Earlier this year, it had tightened the norms for including stocks in the F&O segment, due to rising instances of volatility in the thinly-traded counters. Many stocks were excluded from the derivatives list post the new requirements.

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