90 pct of Rs 38,000 crore raised by pledging shares do not meet collateral prescriptions of RBI

As much as 90 per cent of the Rs 38,000 crore debt raised by promoters by pledging their shares does not meet the collateral prescriptions of the Reserve Bank, finds a report. The findings come amid multiple instances of sharp corrections in the price of pledged shares, which led to concerns on how to deal with the problem.

"As much as 90 per cent of the rated pledged debt has transaction cover of fewer than two times. This is in contrast to the RBI prescription of a minimum collateral cover of two times for lending against shares by banks and non-banking financial firms," Crisil said in a report Monday. Of the total, 10 per cent of the debt has transaction cover of 1.3 times or lower, and provides for additional illiquid collateral like unlisted shares and real estate mortgage to compensate for the lower cover, notes the report.

The Rs 38,000-crore of Crisil-rated debt accounts for up to 40 per cent of the total pledged of promoters, the report said, adding 90 per cent of them are 'A' category and above. The Anil Ambani group, Subhash Chandra's Zee Telefilms, the Singhvi family-run Sun Pharma and the Reddy's of Apollo Hospitals are among the corporates wherein pledged shares had led to various concerns.

While the lenders took the unprecedented step of giving leeway to Zee, the move resulted in litigations in the case of the Reliance group where the courts came down hard on the promoter family. Crisil acknowledged that enforceability of pledge has been called into question in the past because of "legal and practical challenges".

It said debt raised through pledge should be assessed based on the overall cover available through promoter holdings-- both pledged and unencumbered--on the overall debt that the promoter has raised in various holding/investment companies, and not on the pledge and structure of a specific transaction alone. The report explains the overall cover acts as the first line of defence, determines refinancing ability, and provides the flexibility to pledge additional unencumbered shares to maintain the minimum pledge cover requirements and prevent a breach of covenants in any specific transaction.

The agency said assessing debt of a promoter's holding depends on the rating category, an auto-correcting factor that adjusts based on the state of the market and sensitivity of the specific stock to overall market movement.