BUSINESS

Need to view share pledging in more contextual way, says ISB study; calls for awareness on pledging

share market, share pledgingTo help the company evade any downside of share pledging, the report discusses how the board of directors of a firm must caution promoters from over pledging their shares.
(Image: REUTERS)

Share pledging by promoters of a firm has often helped in raising capital for strategic projects and creating value for the stakeholders, a study by Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB) said. Calling for a more balanced and contextual view on share pledging, Sougata Ray, Co-author of the report said that the commonly peddled negative narrative on pledging often dissuades fact-based, informed, balanced, and nuanced debates on its utility, causes and consequences, backed by rigorous research in spite of its ubiquity in India and many other economies of the world. Further, the report listed numerous implications that share pledging has for various stakeholders.

The report, co-authored by Nupur Pavan Bang, Sougata Ray, Nandil Bhatia, and Kavil Ramachandran said that over-optimistic investment plans and over-pledging of shares by promoters, with a pre-planned repayment strategy, is likely to lead to a crisis. “Many promoters are at risk of losing majority ownership of their family firms if the pledged shares are invoked by the financial institutions,” they said.

For investors to dodge any negative impact on their portfolio of such an activity, the report suggests keeping track of their portfolio and regular evaluation of the controlling shareholders of the firm. Investors have been advised to check if controlling shareholders of the firms in which they have invested have pledged their shares.

To help the company evade any downside of share pledging, the report discusses how the board of directors of a firm must caution promoters from over pledging their shares. The report added that the board should shield the firm from such shareholders if they try to manage the margin calls by taking hasty or short-term view decisions in the firm. The study also talks on how regulators such as the RBI and SEBI should take a more balanced view of pledging when making policies.

Further, the study stresses on the need to create awareness and build stronger family governance processes that would put checks and balances with regards to excessive pledging. “The study provides a clarion call for acknowledging that pledging is an important tool to access financial capital for family promoters. It is a legitimate way to raise entrepreneurial financing amongst family businesses and a source of funds to turnaround the family firm if it is in trouble,” said Nupur Pavan Bang, one of the authors of the report.

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