The Promoters Exit Route

Anil Ambani; reliance

The entire controversy around the sudden sale/dumping of shares of the Anil Ambani Group companies by Edelweiss and L&T Finance, revolves around the fact that Anil Ambani had taken huge loans by pledging his company shares for loans taken from these lending NBFCs. Since he could not meet the terms and conditions of the loans taken by him, against pledge of these shares, not just in terms of repayment of the loans taken, but also in terms of replenishment of the security, due to a fall in share prices, these NBFC lenders had no choice but to sell the shares, to recover their loans. The likes of Anil Ambani are facing difficulties in servicing their loans, due to poor performance of their entities, which have eroded the market value of their companies. The market cap of his key listed entities ie. R Power, R Infra, R Com and R Cap has fallen from an aggregate of Rs.2 lakh crores in 2007 to a mere about Rs.27000 crores now, which coincides with most of his shareholding therein, being pledged with these lenders.

The fact is that Anil Ambani is not alone in this spree of promoters of listed companies taking huge loans by pledging their shares with NBFCs. It is a growing trend, as promoters seek more and more avenues to raise funds, at a time when liquidity is scarce and corporate performance has been patchy and poor. Recent data shows that promoters of listed companies have pledged shares worth Rs.2 lac crores, to take loans from NBFCs. These include promoters of 195 listed companies, who have pledged over 50% of their holding, which include big names like the Reliance Group, Apollo Hospitals, GMR, Asian Paints, Zee Group, IndusInd Bank, JSW Energy etc. This incidentally does not include shares of promoters pledged with banks for loans given to companies.

It is worth noting that under the present regulations, lenders are allowed to finance upto 50% against the value of equity shares. Thus when the prices of shares fall, which they have been falling, there is a demand to pledge more shares to replenish and maintain the collateral security levels, which is not possible where most of the promoters holding has been already pledged with the NBFCs, as were witnessed in the Anil Ambani case, where upto 85% of his shareholding in his companies has been already pledged with lenders and there is no more security now available with him.

In India, the likes of Anil Ambani, or any other promoter of a listed entity is the owner/manager of companies, by virtue of being the largest shareholder. It shows their skin in the game and having risked their capital, they get the right to manage the companies they float. But when these very promoters pledge most of their shareholdings to raise loans which they often use to invest in new ventures, they have virtually exited from these entities and truly are not fit to be in charge of the management of such companies any more. It also shows their own lack of confidence in their own companies, apart from their weak financial position. They have virtually encashed their shares and have exited from ownership and must therefore exit from the management too. Such a pledge of shares also belies the trust of ordinary shareholders and other lenders, who chose to invest in the company, based on the promoter holding therein. Lower promoter holding also erodes the market value to these companies. It is time that authorities like SEBI realised that such a large pledge/sale of promoter holding represents his exit from company ownership and that means a new management must be ushered in, to protect shareholder wealth, which in the case of the Reliance Group has depleted by over 50% in a matter of a couple of weeks.

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