PLEdGING by Victor

or example, the promoters of the company may hold 60% of the shares, but what if all those shares are pledged with a financier as collateral for getting additional loan funds? That’s a dangerous situation.

WHY ?

    Promoters, in order to raise funds for either personal or company needs, pledge their holding shares to any financial institution.

    Non-banking financial institutions are more active than banks in providing such loans.  Sometimes, promoters collateralize their shares for converting warrants into shares. Also, they might find share prices in the secondary market quite lucrative for fresh purchase and adopt this route for garnering funds for the consideration to be paid for open market purchase. So there are lots of reasons why promoters pledge their shares. Generally, pledging shares is not a good sign.

As a general rule, if promoters raise the money for the betterment of the business, investors should take it positively but if the money is raised for any personal needs, it imparts negative signal. Even if the funds are raised for improving the business it indicates a liquidity problem.

WHAT DOES PLEDGING INDICATE?

Low credit-worthiness of the company

Businesses need money to grow and invest in resources. The most preferred ways to do this is to go for debt or equities. Going for equities is not a frequent event and hence most of the companies need debt to finance their business expenses. However, some companies do not have enough credit worthiness to secure required debt for their needs. Hence pledging shares is the only way to get loan.

High debt in the company

Companies do not get further debt if they already have high debt in their balance sheet. This could be a reason for companies to pledge the share against loan. A high debt in the balance sheet will increase the interest expenses of the company. Hence major part of the profit will go towards paying the debt holders, leaving very little for shareholders. This will hurt investors in two ways. First, it may eliminate the option of dividends completely. Second, because of low earnings per share, the stock price appreciation is also less.

Its even more dangerous in a falling market.

Bankers or financiers give loan taking the shares as collateral. When the market is in bull phase, pledging doesn’t create issue because promoters can count on rising value of their stake. Banks too do not mind lending against shares because of rising value of shares as collateral. The problem occurs when the market enters in a bear phase. whenever the prices of shares come down to a certain level in the secondary market, the promoter is required to either make some payment or pledge more shares. If the promoter cannot do either, the lender keeps the right to sell pledged shares in the market. Apart from this, promoters always have the risk of a hostile takeover.

NBFC`s -The preferred lenders:

Under Section 19(2) of the Banking Regulation Act 1949, it is provided that no banking company shall hold shares in any company whether as pledgee, mortgagee or absolute owner of an amount exceeding 30% of the paid-up capital of that company or 30% of its own paid-up capital and reserves, whichever is less.So, NBFC`s or other lenders are preferred by promoters as lenders as such loans will give them greater flexibility.

WHERE TO GET THE INFORMATION?

Before the Satyam debacle, there were no disclosure norms made by SEBI (Securities and Exchange Board of India) for promoters to disclose their pledged shares. But post satyam, disclosure regarding Pledging of shares by their promoters has been made mandatory by the Securities exchange board of India. Sebi has asked promoters to disclose details of pledged shares if the same exceeds 25,000 shares in a quarter or 1 per cent of the total shareholding or voting rights of the company, whichever is lower.

WAYS TO HIDE THE INFORMATION.

Many promoters are uncomfortable with their share-pledge details put in the public domain due to the stigma attached to such information and the attention it draws from short sellers.

    In order to keep such borrowings away from the market glare, a promoter often parks a slice of his holding — which is to be used to borrow — into a separate demat account and creates a ‘negative lien’ on it. It’s a mechanism to ensure the shares cannot be pledged or sold to anyone else. Non-banking finance companies (NBFCs) and finance arms of brokerages lend against such an arrangement.

    Another transaction to circumvent the rule is to transfer some of the shares to a special purpose vehicle (SPV) controlled by the promoters or members of the promoter group, and raise money by pledging shares of the SPV.

    It’s also common to give lenders power of attorney that can be exercised to sell shares if borrowers default or certain triggers are breached. Often these are arrangements entered into between the borrower, the brokerage and the NBFC arm of the same brokerage.

CONCLUSION

Pledging shares by promoters is generally not good for investors. However, investors should be careful about the rumours. There could be vested interests in the market that spread rumours about companies and their promoters pledging shares. This happens when the market is already beating down a company because of this. Investors should use the sources available to know about companies and promoters pledging their shares. NSE website is good source of information

Brokers in brief

Ankush Jain

  My experiences with the brokers in brief.


 HDFC Sec: My first broker. No cheating, no calls,tips but expensive.

Ventura: A good broker but little bit expensive in terms of charges. Also, they don’t have mobile trading app for small investors. You need to buy at least 10k plan for that (which means you need to generate a brokerage of 10k in that year else balance amount is gone).

ICICI: They approached me for cheap FNO trading. I was trading 50 rupees per options lot and was looking for cheaper brokerage. The guy from ICICI who called me said he will give the rate of 35 rupees per lot. When I did my first Options transaction, then I realized that 35 is some extra charge apart from Rs. 100/- per lot for options trading taking my per lot total to 135. Also, for cash segment the charges are high. Immediately closed the account.
Angel: I used to receive 7-8 calls daily from my account dealer insisting me to trade aggressively in options (mostly Nifty). I lost some 20k in the due course out of which 8k was paid in brokerage. When I was out of funds, they started pushing me for trading in cash segment which I denied.
 
Nirmal Bang: Same as Angel but didn’t lose money as I rejected many calls which were suspicious. I stopped trading in FNO and withdraw all the money. There moto too was like Angel’s – keep the client busy in trading and generate maximum brokerage.
VNS Finance: . Happy till now.  Note: I am not into trading anymore (be it FNO or cash).

 After reading blogs like this one and many others on value investing, I am studying the same and started investing (not trading) for super long term (30 yrs and more if my Son is interested too :) ). I plan to build a portfolio which should take care of my financial life after retirement. Ideally, dividends should be sufficient for this by then is what I am planning. It’s been over 1 year that I have kept the temptation of trading in FNO out of my mind and will continue doing that.

Ankush Jain
My experiences with the brokers in brief.
HDFC Sec: My first broker. No cheating, no calls,tips but expensive.
Ventura: A good broker but little bit expensive in terms of charges. Also, they don’t have mobile trading app for small investors. You need to buy at least 10k plan for that (which means you need to generate a brokerage of 10k in that year else balance amount is gone).
ICICI: They approached me for cheap FNO trading. I was trading 50 rupees per options lot and was looking for cheaper brokerage. The guy from ICICI who called me said he will give the rate of 35 rupees per lot. When I did my first Options transaction, then I realized that 35 is some extra charge apart from Rs. 100/- per lot for options trading taking my per lot total to 135. Also, for cash segment the charges are high. Immediately closed the account.
Angel: I used to receive 7-8 calls daily from my account dealer insisting me to trade aggressively in options (mostly Nifty). I lost some 20k in the due course out of which 8k was paid in brokerage. When I was out of funds, they started pushing me for trading in cash segment which I denied.
Nirmal Bang: Same as Angel but didn’t lose money as I rejected many calls which were suspicious. I stopped trading in FNO and withdraw all the money. There moto too was like Angel’s – keep the client busy in trading and generate maximum brokerage.
VNS Finance: This is the one which I mentioned in my previous comment. Happy till now.
Note: I am not into trading anymore (be it FNO or cash). After reading blogs like this one and many others on value investing, I am studying the same and started investing (not trading) for super long term (30 yrs and more if my Son is interested too ). I plan to build a portfolio which should take care of my financial life after retirement. Ideally, dividends should be sufficient for this by then is what I am planning.
It’s been over 1 year that I have kept the temptation of trading in FNO out of my mind and will continue doing that.
- See more at: http://www.subramoney.com/2014/10/risk-management-in-equities/#sthash.DqkCXs4l.dpuf

Ankush Jain
My experiences with the brokers in brief.
HDFC Sec: My first broker. No cheating, no calls,tips but expensive.
Ventura: A good broker but little bit expensive in terms of charges. Also, they don’t have mobile trading app for small investors. You need to buy at least 10k plan for that (which means you need to generate a brokerage of 10k in that year else balance amount is gone).
ICICI: They approached me for cheap FNO trading. I was trading 50 rupees per options lot and was looking for cheaper brokerage. The guy from ICICI who called me said he will give the rate of 35 rupees per lot. When I did my first Options transaction, then I realized that 35 is some extra charge apart from Rs. 100/- per lot for options trading taking my per lot total to 135. Also, for cash segment the charges are high. Immediately closed the account.
Angel: I used to receive 7-8 calls daily from my account dealer insisting me to trade aggressively in options (mostly Nifty). I lost some 20k in the due course out of which 8k was paid in brokerage. When I was out of funds, they started pushing me for trading in cash segment which I denied.
Nirmal Bang: Same as Angel but didn’t lose money as I rejected many calls which were suspicious. I stopped trading in FNO and withdraw all the money. There moto too was like Angel’s – keep the client busy in trading and generate maximum brokerage.
VNS Finance: This is the one which I mentioned in my previous comment. Happy till now.
Note: I am not into trading anymore (be it FNO or cash). After reading blogs like this one and many others on value investing, I am studying the same and started investing (not trading) for super long term (30 yrs and more if my Son is interested too ). I plan to build a portfolio which should take care of my financial life after retirement. Ideally, dividends should be sufficient for this by then is what I am planning.
It’s been over 1 year that I have kept the temptation of trading in FNO out of my mind and will continue doing that.
- See more at: http://www.subramoney.com/2014/10/risk-management-in-equities/#sthash.DqkCXs4l.dpufAnkush Jain  My experiences with the brokers in brief.  HDFC Sec: My first broker. No cheating, no calls,tips but expensive.  Ventura: A good broker but little bit expensive in terms of charges. Also, they don’t have mobile trading app for small investors. You need to buy at least 10k plan for that (which means you need to generate a brokerage of 10k in that year else balance amount is gone).  ICICI: They approached me for cheap FNO trading. I was trading 50 rupees per options lot and was looking for cheaper brokerage. The guy from ICICI who called me said he will give the rate of 35 rupees per lot. When I did my first Options transaction, then I realized that 35 is some extra charge apart from Rs. 100/- per lot for options trading taking my per lot total to 135. Also, for cash segment the charges are high. Immediately closed the account.  Angel: I used to receive 7-8 calls daily from my account dealer insisting me to trade aggressively in options (mostly Nifty). I lost some 20k in the due course out of which 8k was paid in brokerage. When I was out of funds, they started pushing me for trading in cash segment which I denied.  Nirmal Bang: Same as Angel but didn’t lose money as I rejected many calls which were suspicious. I stopped trading in FNO and withdraw all the money. There moto too was like Angel’s – keep the client busy in trading and generate maximum brokerage.  VNS Finance: This is the one which I mentioned in my previous comment. Happy till now.  Note: I am not into trading anymore (be it FNO or cash). After reading blogs like this one and many others on value investing, I am studying the same and started investing (not trading) for super long term (30 yrs and more if my Son is interested too :) ). I plan to build a portfolio which should take care of my financial life after retirement. Ideally, dividends should be sufficient for this by then is what I am planning. It’s been over 1 year that I have kept the temptation of trading in FNO out of my mind and will continue doing that.

Ankush Jain
My experiences with the brokers in brief.
HDFC Sec: My first broker. No cheating, no calls,tips but expensive.
Ventura: A good broker but little bit expensive in terms of charges. Also, they don’t have mobile trading app for small investors. You need to buy at least 10k plan for that (which means you need to generate a brokerage of 10k in that year else balance amount is gone).
ICICI: They approached me for cheap FNO trading. I was trading 50 rupees per options lot and was looking for cheaper brokerage. The guy from ICICI who called me said he will give the rate of 35 rupees per lot. When I did my first Options transaction, then I realized that 35 is some extra charge apart from Rs. 100/- per lot for options trading taking my per lot total to 135. Also, for cash segment the charges are high. Immediately closed the account.
Angel: I used to receive 7-8 calls daily from my account dealer insisting me to trade aggressively in options (mostly Nifty). I lost some 20k in the due course out of which 8k was paid in brokerage. When I was out of funds, they started pushing me for trading in cash segment which I denied.
Nirmal Bang: Same as Angel but didn’t lose money as I rejected many calls which were suspicious. I stopped trading in FNO and withdraw all the money. There moto too was like Angel’s – keep the client busy in trading and generate maximum brokerage.
VNS Finance: This is the one which I mentioned in my previous comment. Happy till now.
Note: I am not into trading anymore (be it FNO or cash). After reading blogs like this one and many others on value investing, I am studying the same and started investing (not trading) for super long term (30 yrs and more if my Son is interested too ). I plan to build a portfolio which should take care of my financial life after retirement. Ideally, dividends should be sufficient for this by then is what I am planning.
It’s been over 1 year that I have kept the temptation of trading in FNO out of my mind and will continue doing that.
- See more at: http://www.subramoney.com/2014/10/risk-management-in-equities/#sthash.DqkCXs4l.dpuf

Ankush Jain
My experiences with the brokers in brief.
HDFC Sec: My first broker. No cheating, no calls,tips but expensive.
Ventura: A good broker but little bit expensive in terms of charges. Also, they don’t have mobile trading app for small investors. You need to buy at least 10k plan for that (which means you need to generate a brokerage of 10k in that year else balance amount is gone).
ICICI: They approached me for cheap FNO trading. I was trading 50 rupees per options lot and was looking for cheaper brokerage. The guy from ICICI who called me said he will give the rate of 35 rupees per lot. When I did my first Options transaction, then I realized that 35 is some extra charge apart from Rs. 100/- per lot for options trading taking my per lot total to 135. Also, for cash segment the charges are high. Immediately closed the account.
Angel: I used to receive 7-8 calls daily from my account dealer insisting me to trade aggressively in options (mostly Nifty). I lost some 20k in the due course out of which 8k was paid in brokerage. When I was out of funds, they started pushing me for trading in cash segment which I denied.
Nirmal Bang: Same as Angel but didn’t lose money as I rejected many calls which were suspicious. I stopped trading in FNO and withdraw all the money. There moto too was like Angel’s – keep the client busy in trading and generate maximum brokerage.
VNS Finance: This is the one which I mentioned in my previous comment. Happy till now.
Note: I am not into trading anymore (be it FNO or cash). After reading blogs like this one and many others on value investing, I am studying the same and started investing (not trading) for super long term (30 yrs and more if my Son is interested too ). I plan to build a portfolio which should take care of my financial life after retirement. Ideally, dividends should be sufficient for this by then is what I am planning.
It’s been over 1 year that I have kept the temptation of trading in FNO out of my mind and will continue doing that.
- See more at: http://www.subramoney.com/2014/10/risk-management-in-equities/#sthash.DqkCXs4l.dpuf

Ankush Jain
My experiences with the brokers in brief.
HDFC Sec: My first broker. No cheating, no calls,tips but expensive.
Ventura: A good broker but little bit expensive in terms of charges. Also, they don’t have mobile trading app for small investors. You need to buy at least 10k plan for that (which means you need to generate a brokerage of 10k in that year else balance amount is gone).
ICICI: They approached me for cheap FNO trading. I was trading 50 rupees per options lot and was looking for cheaper brokerage. The guy from ICICI who called me said he will give the rate of 35 rupees per lot. When I did my first Options transaction, then I realized that 35 is some extra charge apart from Rs. 100/- per lot for options trading taking my per lot total to 135. Also, for cash segment the charges are high. Immediately closed the account.
Angel: I used to receive 7-8 calls daily from my account dealer insisting me to trade aggressively in options (mostly Nifty). I lost some 20k in the due course out of which 8k was paid in brokerage. When I was out of funds, they started pushing me for trading in cash segment which I denied.
Nirmal Bang: Same as Angel but didn’t lose money as I rejected many calls which were suspicious. I stopped trading in FNO and withdraw all the money. There moto too was like Angel’s – keep the client busy in trading and generate maximum brokerage.
VNS Finance: This is the one which I mentioned in my previous comment. Happy till now.
Note: I am not into trading anymore (be it FNO or cash). After reading blogs like this one and many others on value investing, I am studying the same and started investing (not trading) for super long term (30 yrs and more if my Son is interested too ). I plan to build a portfolio which should take care of my financial life after retirement. Ideally, dividends should be sufficient for this by then is what I am planning.
It’s been over 1 year that I have kept the temptation of trading in FNO out of my mind and will continue doing that.
- See more at: http://www.subramoney.com/2014/10/risk-management-in-equities/#sthash.DqkCXs4l.dpuf

Liquidity

Liquidity refers to how easy it is to buy and sell shares without seeing a change in price. If, for example, you bought stock ABC at Rs 10 and sold it immediately at Rs 10, then the market for that particular stock would be perfectly liquid. If instead you were unable to sell it at all, the market would be perfectly illiquid. Both of these situations rarely occur, so we generally find the market for a particular stock somewhere in between these two extremes.

The bid-ask spread and volume of a particular stock are closely interlinked and play a significant role in the liquidity. The bid is the highest price investors are willing to pay for a stock, while ask is the lowest price at which investors are willing to sell a stock. Because these two prices must meet in order for a transaction to occur, consistently large bid-ask spreads imply a low volume for the stock while consistently small bid-ask spreads imply high volume.

For example, a bid of Rs 10 and an ask of Rs 11 for stock ABC is a fairly large spread, meaning the buyer and seller are far apart. No transactions can take place until the buyer and seller agree on price. Should this large bid-ask spread continue, few transactions would occur and volume levels would be low, implying poor liquidity: either the bid or ask price (or both) would have to move for a transaction to take place. On the other hand, a bid of Rs 10 and an ask of Rs 10.05 for stock ABC would imply that the buyer and seller are very close to agreeing on a price. As a result, the transaction is likely to occur sooner and, if these prices continued, the liquidity for stock ABC would be high.