Bloomberg News

Founders’ Share Pledges to Banks at Record High: Corporate India

June 18, 2012

Founders of Indian companies have pledged a record proportion of their shares with lenders in return for loans, raising the risk of some owners ceding control as they struggle to raise funds.

Holders of companies that form the BSE-500 Index, including Pantaloon Retail Ltd. (PF) and United Spirits Ltd. (UNSP), the nation’s top retailer and the second-biggest maker of alcoholic beverages, pledged 10.4 percent of their stakes in the March quarter, compared with 9.4 percent in the same period a year earlier, according to ICICI Securities Ltd. That’s the highest since 2009 when it became compulsory for firms to disclose the data.

While the BSE-500 Index has slid 9 percent in the past year as expansion in Asia’s third-biggest economy slowed to a near- decade low in the March quarter, most lenders are still to lower interest costs after the central bank pared its key rate in April for the first time in three years. Founders who have pledged a large chunk of their shares may lose control of their companies should a further drop in equity prices erode the value of the collateral.

“The risks associated with pledging of shares are quite significant, as in case of default, lenders can sell the shares in the open market to recover their dues,” Bharat Chhoda, an analyst at ICICI Securities, a unit of India’s second-biggest lender, said yesterday.

Billionaire Vijay Mallya’s United Spirits and real-estate developer Housing Development & Infrastructure Ltd. (HDIL) are among seven companies with a market value exceeding 10 billion rupees ($178 million) where founders pledged more than 90 percent of their holdings, while owners of APM Terminals Mauritius-backed Gujarat Pipavav Port Ltd. (GPPV) and Thomas Cook (India) Ltd. offered their entire stakes as collateral, exchange filings show.

‘Wary Investors’

While shares of United Spirits and HDIL have retreated 30 percent and 59 percent each in the past year, Pantaloon Retail sank 42 percent and Gujarat Pipavav 12 percent in the period.

“Companies with a high proportion of pledged holdings are susceptible to such erosion in share prices,” said Chhoda. “Investors are wary of such companies.”

Thomas Cook (India) has surged 88 percent this year amid a sale last month by its U.K.-based parent to Fairbridge Capital (Mauritius) Ltd. for 8.17 billion rupees. Thomas Cook Group Plc agreed to sell its entire 77 percent holding in the Indian tour operator, according to an exchange filing.

Cash Squeeze

Individuals and companies are resorting to pledging shares as a cash squeeze at local banks increases borrowing costs, said Tarun Bhatia, senior director for capital markets at Crisil Ltd., a unit of Standard & Poor’s. The cost to borrow one-year funds selling commercial paper climbed to a three-year high of 11.6 percent on March 2, data from the Fixed Income Money Market & Derivatives Association of India show.

A gauge of cash shortage in the financial system entered a record eighth month, with lenders borrowing an average 841 billion rupees a day this month from the central bank, above the 600 billion-rupee maximum limit favored by the RBI.

“Access to capital is tight,” Bhatia said in a phone interview. “Banks are selective about lending and interest rates are high.”

The Reserve Bank of India, which unexpectedly left rates unchanged yesterday, raised the cap on credit to exporters. The measure will release more than 300 billion rupees into banks, according to the RBI.

The percentage of holdings pledged by owners was the most in the textiles, tourism and real-estate sectors compared with others in the March quarter, analysts led by Sunita Baldawa at Kotak Institutional Equities wrote in a June 8 report.

Some founders also revoked their share pledges, aided by a 13 percent rally in the benchmark BSE India Sensitive Index in the first three months of 2012.

Tata Coffee Ltd. (TCO), a subsidiary of Tata Global Beverages Ltd. that has a venture with Starbucks Corp., took back 98 percent of its shares, according to the Kotak report. Adani Power Ltd. (ADANI), controlled by billionaire Gautam Adani, cut the proportion of its pledged shares to 20 percent from 54 percent in the December quarter, the report said.

To contact the reporters on this story: Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net; Anurag Joshi in Mumbai at ajoshi53@bloomberg.net

To contact the editors responsible for this story: Darren Boey at dboey@bloomberg.net; Shelley Smith at ssmith118@bloomberg.net


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