Pledging of Shares: Meaning, Risks, Impact on Share Price & How Investors Should Evaluate It

 

Pledging of shares is one of the most important factors to evaluate before investing in a company. It can signal financial stress, increase volatility, and impact the future performance of a stock. Unfortunately, many investors ignore it completely.

This article explains:

• What pledging of shares means
• Why promoters pledge their shares
• How pledging affects stock prices
• Real examples of companies with high pledging
• SEBI rules related to pledging
• How investors should interpret pledged shares

Let’s break it down clearly.

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1. What Is Pledging of Shares?

Promoters—the founders or major stakeholders of a company—often need funds to run the business. This may be for:

• Working capital
• Expansion
• Debt repayment
• Operational needs

Instead of selling their shares, promoters may pledge their shares to a bank as security and take a loan.

Simple Example

• A promoter needs ₹50 crore
• Bank demands security
• Promoter pledges shares worth ₹100 crore
• Bank gives the ₹50 crore loan

The pledged shares act as collateral.

This process is known as share pledging.

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2. Why Do Promoters Pledge Shares?

Promoters pledge shares mainly to raise money without reducing ownership. Typical reasons include:

• Funding the company’s day-to-day operations
• Addressing short-term liquidity issues
• Financing expansion
• Managing cash flow shortages

While pledging is not always negative, excessive pledging can be a red flag.

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3. What Happens if Share Prices Fall?

Here is where pledging becomes risky.

Suppose:

• Loan taken = ₹50 crore
• Shares pledged = worth ₹100 crore

Now imagine share prices fall and the pledged shares drop in value:

• New share value = ₹80 crore
• Shortfall = ₹20 crore

Banks will then ask promoters to fix this shortfall in one of three ways:

Option 1: Pledge more shares

Pledge additional shares worth ₹20 crore.

Option 2: Pay cash

Pay ₹20 crore to cover the deficit.

Option 3: Repay part of the loan

Repay, say, ₹10 crore so collateral ratio stabilizes.

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4. What If Promoters Do Not Cover the Shortfall?

This is the worst-case scenario.

If promoters do not:

• Pledge more shares
• Pay the deficit
• Repay the loan

Then banks have the right to sell the pledged shares in the open market to recover their money.

Impact of Forced Selling

If banks dump large volumes of shares into the market, supply shoots up instantly.

More supply + same demand = sharp fall in share price

This is why highly pledged shares are risky.

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5. Real Examples: Companies With Very High Pledging

Some companies in India have shockingly high levels of pledged shares.

Example:

One company increased its pledging to 100% of promoter holding — E*mpasis (not to be confused with Infosys).

Data (as compiled by Business Standard) shows:

• Emphasis: 100% promoter shares pledged
• Torrent Pharma: High promoter pledging
• Shriram Transport Finance (example pattern)
• Emami: Significant pledging levels

When promoter pledging increases suddenly, it can trigger investor panic, resulting in sharp price corrections.

Example: Strides Pharma’s share price fell over 22% after a rise in pledging.

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6. Does High Pledging Always Mean Share Prices Will Fall?

Not always.

If a company:

• Has strong fundamentals
• Has steady cash flows
• Has low debt overall

…it may still perform reasonably well.

However, high pledging + weak fundamentals = extreme risk.

Investors must evaluate both together.

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7. What Does SEBI Say About Pledging?

To protect investors, SEBI has introduced two key rules:

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Rule 1: Increased Disclosure

Companies must disclose:

• Total number of shares pledged
• Percentage of promoter holding pledged
• Any changes in pledging

This information is available on:

• NSE website
• BSE website
• Moneycontrol (shareholding pattern section)

Investors must check this before buying any stock.

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Rule 2: Higher Margins for Traders

If a company has more than 25% promoter shares pledged, SEBI requires brokers to collect higher margins from traders.

Meaning:

Stocks with high pledging are riskier, so you need to keep extra margin when trading them.

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8. How Should Investors Analyse Pledged Shares?

A few practical rules:

1. Prefer companies with low or zero promoter pledging

Zero pledge = strong financial management.

2. If pledging is high, check WHY

Is the promoter raising money for growth or covering losses?

3. Watch sudden spikes

A sudden jump in pledged shares often signals liquidity stress.

4. Combine pledging data with fundamentals

High debt + high pledging = major warning sign.

Low debt + stable profits + pledging = manageable.

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9. Final Takeaways

• Pledging is common in India but excessive pledging is a danger signal.
• Forced sale of pledged shares can trigger steep price falls.
• SEBI has tightened disclosure norms and margin requirements.
• Investors must always check pledging data before investing.

Understanding share pledging helps you avoid high-risk companies and make safer stock market decisions.