Pledging

Q.  Which of the following is/are true?

1) Pledging is pledging shares or keeping a part of shares as mortgage.
2) Pledging is done with banks only. NBFCs are not allowed in it.

- Published on 18 Mar 16

a. Only 1
b. Only 2
c. Both 1 and 2
d. Neither 1 nor 2

ANSWER: Only 1
 
  • The worrisome state of financials of most listed companies has led to promoters increasingly pledging their shares.
  • Promoters of listed companies often pledge their shares to raise short-term capital to fund working capital requirements.
  • The shares are typically pledged with NBFCs or even banks, which lend up to a certain percentage of the value of shares that are offered to be pledged.
  • Pledging cannot be generalized. Promoters could be pledging more due to increasing debts. The borrowing could be going up without any corresponding rise in profitability.
  • It could also be for raising funds for other ventures. The promoter could be facing a default scenario and might have to furnish additional securities to avoid default. Investors should carefully look at the purpose of pledging and then take an informed decision

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