Chart: NBFCs Most Exposed To Risk From Promoter-Pledged Shares
NBFCs have the largest exposure to promoter pledges shares, shows data from the RBI’s Financial Stability Report
Risks related to equity pledged by promoters of corporations, particularly through innovative structures, have come to the fore in recent months. Mutual funds, in particular, have felt the pain of such investments in debt backed by equity held by prominent promoters like Subhash Chandra and Anil Ambani.
The risk, however, isn’t restricted to mutual funds, shows data put out by the Reserve Bank of India in its Financial Stability Report released on Thursday. The data shows that non-bank lenders actually have the largest exposure to pledged shares.
The reported share of mutual funds in total exposure to promoter pledged shares has gone up to about 30 percent from 20 percent in June 2014. The share has been fairly stable for the last two years, the RBI said. In contrast, there is a significant increase in the reported share of non-banks over the last five years, the RBI said.
The data also includes a category where the pledgee name is not available. The RBI caveats its data by saying that “it’s possible that the “pledgee name N.A” category includes some share of the mutual funds, non-banks or Indian Banks.”
The aggregate exposure of these four categories to pledged shares as on March was Rs 2.25 lakh crore, marginally lower than that the Rs 2.34 lakh crore in December 2018.
The RBI cautioned that a high level of pledging can be a warning signal. “In a falling market in particular, pledged shares are under pressure as diminished share prices bring down the collateral value, prompting lenders to either demand additional margins or sell the shares to protect their interests.”
It added that investors may face a double whammy if they have exposure to pledged shares of companies with deteriorating fundamentals.
“Such a movement is of particular concern when increase in the risk of underlying exposure accompanies falling share prices. In effect, debt instruments backed by equity shares have a downside that is akin to that of a short put option on the underlying shares.” In simple terms, this means that an investor holding debt backed by pledged shares of a company with weakening fundamentals has unlimited downside risk.