As share pledging continues to trigger panic selling of stocks, over 70 companies revoked their share pledges in the June quarter.

At the same time, some of the large-cap companies continued to have high volumes of share pledges -- both in terms of percentage of promoter holding as well as value terms -- as loan against shares continued to be one of the easier modes for raising finance in a challenging business environment.

At the end of June quarter, TCS topped the list in share pledging in value terms with a pledge value of $1825 million, with others like Essar Oil, Apollo Hospitals, Tata Motors, Hero Motocorps, M&M, GMR Infra, JSW Steel, Asian Paints, among others making it to the list of top 50 firms.

The utilities sector saw the largest drop in share pledging while healthcare witnessed a pick-up. Consumer discretionary followed by materials had the biggest volume of share pledging by promoters in terms of value. As a percentage of market capitalisation, share pledging was highest for financials and energy, while as a percentage of promoter holding, the percentage of share pledging was highest for energy and lowest for technology.

Utilities, like a few other sectors, have higher promoter share pledges because of collateral requirements.

"At the end of the June quarter, the total value of pledged stocks of Indian companies was $23 billion, down 8 per cent from the lows of March quarter. In rupee terms, the total pledged value stood at Rs 1.28 lakh crore, up 1 per cent QoQ. Marked to market, as per the previous day’s close, the pledged value of shares was $22 billion, down 9 per cent QoQ without accounting for any subsequent changes that may have happened to the number of shares pledged. In rupee terms marked to market, the pledged value of shares was Rs 1.27 lakh crore, down 0.5 per cent QoQ," Morgan Stanley analysts Sheela Rathi,
Ridham Desai, Utkarsh Khandelwal and Amruta Pabalkar said in an analysis.

The December quarter of FY12 saw widespread panic among investors over share pledging by promoters, as disclosures of huge share pledges by promoters and selling of shares by lenders in the open market due to margin calls led stocks to plunge, which caught retail investors off guard on the counters of GTL, GTL Infra, Parsvnath Developers, Suzlon Energy. GTL saw yet another wave of selling this past week, leaving the stock at a lifetime low, after its promoters pledged fresh shares.

Market analysts say while share pledging in a very normal way of raising funds in corporate finance world over, often it becomes problematic when the chips are down.

Says Pankaj Pandey, head of research at ICICIdirect, "In a rising stock market, there is no concern. However, in a down market if the price of the stock declines to a certain level, promoters in a share pledge arrangement are required to make additional payment or pledge more shares. If the promoter defaults or is unable to provide further shares as margin, then the lender may sell the shares in the open market, which may result in an erosion of stock price."

However, Pandey says the method is beneficial for promoters as well as lenders. "It allows promoters access to quick short-term financing whereas lenders charge premium rates for such arrangements," he points out.

Data available on pledged shares for the past 12 quarters show promoters have utilised this method to raise loans on a regular basis. On an average, 8-10 per cent of promoter holdings have been pledged during September 2009-June 2012.

In the June quarter, out of the 814 companies that had reported share pledges in March, a total of 70 revoked their full pledges while 22 companies reported fresh share pledges.

Out of them, 180 companies reported lower pledging versus the previous quarter while 139 companies increased it; 427 others kept their pledge levels unchanged.

Eleven promoters increased their share pledges by more than 25 per cent during the June quarter, while a similar number brought it down by 25 per cent or more. Out of the 767 companies that reported pledging, promoters of 246 companies had pledged more than 50 per cent of their holdings.

These loans typically have a tenure of one to three years and carry a margin requirement of two or three times. "Simply put, it means that the value of the promoters' shares pledged is two to three times the amount of the loan," says Pandey.

According to the Morgan Stanley analysts, assuming a 50 per cent margin, the bank credit to the promoters who had share pledges at the end of June quarter stood at $11.5 billion, which was 2.7 per cent of outstanding bank credit.