MUMBAI: Dealers staring at their trading screens on last Friday were baffled. They did not know what hit them. Benchmark indices were down over 1000 points and most stocks shed 10-15%. One particular stock, however, caught everyone’s attention.
Core Projects opened with a huge negative gap, in line with the indices. And within a few hours, the stock saw more than half of its value being eroded. Dealers were seen making frantic calls to ascertain the reason behind the massive and sudden fall. As the session progressed, various theories were attributed to the bruising decline.
According to the market talk, the promoters of Core Projects had pledged a large number of shares with some non-banking financial companies (NBFCs). As the market nosedived, the share price of Core Projects plummeted, bringing down the value of the collateral.In a scenario where the promoters are unable to garner additional funds, NBFCs start selling the pledged shares to recover money. This, say marketmen, starts a chain reaction, and therefore, it is best for investors to stay away from companies whose promoters are known to have pledged their shares.
The promoters of several companies pledged their shares with various NBFCs to avail of working capital. The issue of Core Projects was not a standalone case, according to marketmen. Parsvnath Developers, Shree Ashtavinayak Cine Vision, Goldstone Technologies, KS Oils, Pyramid Saimira, Sterling Biotech and Akruti City are some names that are doing the rounds in the market. These shares carry a higher risk as a major fall in their prices could trigger a selling-spree by NBFCs.
Barring Parsvnath Developers, an email sent to the other companies remained unanswered. Parsvnath Developers assistant vice president (finance) Ashok Dang, in an email reply, said, “Our promoter, Pradeep Jain had taken a loan of Rs 115 crore from a bank and NBFCs by pledging shares. The loan has been repaid to the extent of Rs 44 crore and the outstanding is now only Rs 71 crore”.
The promoters of not only mid- and small-cap companies, but also some large-cap companies, have been pledging shares to raise funds, say brokers. “If any share outperforms the broader market (without any fundamental support) during a bull run or underperforms when the market falls, there are chances that the promoters have pledged shares and have reasons to maintain an artificial price level,” says the head of a NBFC.
The stock, incidentally, touched a 52-week high in July, when the Sensex was down nearly 40% from its peak. Sterling Biotech gained marginal ground in the first 10 months of this calendar year. However, some real estate entities have lost considerable ground during the ongoing downturn.The shareholding pattern of Secunderabad-based Goldstone Technologies clearly reveals that many brokerages hold shares of the company in their margin accounts. India Infoline, Sharekhan, Religare Securities, Standard Chartered Bank, IL&FS Investment Securities and Aryan Share & Stock Brokers account for more than 1% of the company’s equity.
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