SHARES PLEDGING- PAINFUL TROUBLE.
WHILE INVESTING IN A STOCK WE TEND TO FIND OUT THE TRUE OR INTRINSIC VALUE OF THE STOCK AND COMPARE IT WITH THE CURRENT PRICE .WE TRY TO FIND OUT COMPANIES WHICH HAVE INTRINSIC VALUE HIGHER THAN THE THE TRUE VALUE.WHILE LOOKING THROUGH MY DATA BASE I SOMETIMES SAW SUCH COMPANIES WITH GOOD BALANCE SHEET AND FINANCIAL RESULTS,HIGH ROE, AND THEN I PONDER WHY THIS PARTICULAR STOCK IS NOT MOVING OR IS AT LOW PE THAN ITS PEERS.AM I MISSING SOMETHING WHICH I DONT KNOW.THEN THE PERCENTAGE OF PLEDGED PROMOTERS STAKE SHOOK MY HEAD RIGOURSELY.
WHAT IS A SHARE PLEDGING .? WHY DO COMPANIES PLEDGE IT? WHY MR MARKET DOES NOT WELCOME PLEDGING OF SHARES
SHARE PLEDGING IS A DANGEROUS FINANCIAL TOOL OF RAISING CAPITAL AND FUNDS BY THE PROMOTERS IN ORDER TO MEET COMPANY FINANCIAL NEEDS OR BUISNESSNEEDS,,AQUISITIONS.THIS METHOD SEEMS TO BE EASY AND CONVINIENT TO THE PROMOTERS AS WELL AS TO THE LENDERS . TECHNICALLY IT IS THE LAST METHOD AVAILABLE OR YOU CAN SAY THE EASIEST ONE TO RAISE FUNDS BY PROMOTERS.LENDERS GET TWICE OR THRICE TIMES THE VALUE OF THE SHARES AND THE LIBERTY TO SELL THESE SHARES IN THE OPEN MARKET IN CASE STOCKS FELLS DOWN.
FEW YEARS AGO WHEN THE INTEREST RATES WERE AT HIGH LEVELS AND THE INDIAN ECONOMY WAS STRUGGLING AND IN ORDER TO MEET COMPANY CAPITAL NEEDS PROMOTERS PLEDGE THEIR SHARES TO GET LOAN HALF OR ONE THIRD OF AMOUNT OF PLEDGE SHARES.TILL HERE THERE SEEMS NO HARM . BUT THE ROSES ARE NOT SO RED. THERE IS NOT AT ALL CONCERN IF EVERYTHING IS GOOD AND MARKET IS GOING UP. WHEN EVER MARKET GOES TO A CORRECTIVE PHASE THE VALUE OF STOCK GOES DOWN AND IN ORDER TO MEET THE COLLATERAL THE PROMOTERS HAS TO PLEDGE MORE SHARES TO THE LENDER OTHERWISE LENDER WILL SELL IT.FOR EXAMPLE- SUPPOSE A COMAPANY 'A' PLEDGED 1 LAKH SHARES OF 100 RS TO MEET THE COLLATERAL OF 1 CRORE RS AND IF STOCK GOES IN CORRECTIVE PHASE ,OR THE COMPANY PRODUCED BAD RESULTS AND THE PRICE GOES TO RS 80 THEN THE PROMOTERS HAS TO PLEDGE 125000 SHARES @ 80 RS TO MEET THE COLLATERAL OF 1 CR.(125000*80=1CR).AND IF THE PROMOTERS DO NOT PLEDGE MORE SHARES TEN THE LENDER WILL SELL IT IN OPEN MARKET CAUSING BIG CRASH IN THE STOCK PRICE AND A SUDDEN MASSIVE EROSION OF SHAREHOLDER WEALTH AND CONFIDENCE. THE SCENARIO IS EVEN WORSE IN CASE OF HIGH BETA COMPANIES.THIS CAN ALSO MAKE PROMOTERS LOOSING CONTROL OVER THE COMPANY.EXAMPLE- SATYAM COMPUTERS.
SO WE CAN WITHNESS A CRASH IN PRICE UPTO 80% IN SOME STOCKS.SOME PEOPLE HAS MISCONCEPTION THAT IT IS A TEMPORARY PHASE AND THE STOCK WILL REBOUND AS THE INTRINSIC VALUE OF THE STOCK REMAINS SAME AND FUNDAMENTALLY IT IS GOOD STOCK. TO MY OPINION A FUNDAMENTALLY GOOD BUISNESS DO NOT REQUIRE SUCH TYPE OF METHODS TO RAISE FUNDS. A GOOD BUISNESS GENERATES CAPITAL ITS OWN.AFTER A BIG CRASH PEOPLE DO NOT TRUST IN SUCH COMPANIES MOREOVER THEY DO NOT KNOW HOW MUCH PLEDGED PORPORTION IS STILL WITH LENDER.TECHNICALLY THE STOCK CAN MOVE UP IN A SHORT TERM AFTER 80% CRASH BUT TO GET CMP EQUAL TO INTRINSIC VALUE THE CLOCK HAS TO MOVE FOR YEARS .THE SMART INVESTOR KNOWS WHERE TO INVEST AND ACE INVESTOR KNOWS WHERE NOT TO INVEST. IN MY VIEW ONE SHOULD KEEP A LONG DISTANCE FROM THE COMPANIES .
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