In today’s blog, we’ll explain what pledged shares are and their potential impact on your investment portfolio.
What are Pledged Shares?
Let’s understand with the help of the Example
ABC Ltd., a fast-growing tech company, wants to expand but doesn’t want to issue more shares that would dilute ownership. The company applies for a Rs 10 million loan from a bank to get more money.
Ms. Smith, the CEO, owns 20% of ABC Ltd shares. She offers 10% of her shares as collateral for the loan. This means that while the loan is unpaid, the bank has a claim on those shares.
Even though Ms. Smith has pledged her shares, she usually still has the right to vote with them, although there might be some restrictions due to the loan terms. She cannot sell the pledged shares until the loan is fully repaid. If she fails to repay, the bank can sell those shares to recover its money.
Why are shares Pledged?
Pledging shares can offer several advantages, including the following:
1. Obtaining Funds
Pledging shares is a quick and easy way to get money without giving up ownership. Shareholders can use shares as collateral for personal, business, or expansion loans.
2. No Need to Sell Shares
Instead of selling shares to raise funds, you can pledge them. This allows you to keep your shares and continue benefiting from the company’s growth.
3. Low Interest Rates
Loans backed by pledged shares often come with lower interest rates compared to unsecured loans, making borrowing more affordable.
4. Better Loan Terms
Pledging shares can help you get better loan terms, such as longer repayment periods and lower interest rates.
5. Tax Benefits
Interest paid on loans secured by pledged shares may be tax-deductible, potentially reducing your taxable income.
How Do Non-Promoters Pledge Shares?
When non-promoters pledge shares, it means that someone who isn’t part of the company’s main promoter group is using their shares as collateral to get a loan or funding. They do this to raise money for various needs, like investing more or dealing with personal finances. However, there are risks involved, such as changes in stock prices affecting the value of the pledged shares, losing voting rights, and the possibility of being required to add more collateral if the stock price drops.
Here are steps through which you can pledge shares
Check Eligibility: Not all shares can be pledged. To find out which shares in your portfolio can be used, contact your broker.
Start the Pledge Request: Most brokers allow you to begin the pledge process by phone or through their online platform.
Select Shares and Quantity: Decide which shares you want to pledge and how many.
Review and Approve: Look over the terms of the pledge agreement. Once you agree, your broker will handle the process with the depository (like CDSL or NSDL in India).
Authorize with Depository: You’ll get a message or request from the depository’s online portal to approve the pledge. You might need to enter a one-time password (OTP) sent to you by email or SMS.
How do you find out if the Company has Pledged Shares or not?
Companies regularly report information about pledged shares to regulatory bodies like the NSE and BSE.
NSE: Go to “Corporate Filings and Actions” and look for “Pledged Data.”
BSE: The BSE site doesn’t have a specific section for pledged shares, but you might find relevant details in their filings.
Conclusion
In conclusion, pledging stocks can be advantageous by providing cash for investments and liquidity without selling assets. However, it also comes with risks such as margin calls, stock price fluctuations, and potential loss of control if repayment issues arise. The impact of pledging shares depends on how well it is managed and how it fits with the company’s long-term financial strategy.
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Disclaimer: The information provided in this Blog is for educational purposes only and should not be construed as financial advice. Trading in the stock market involves a significant level of risk and can result in both profits and losses. Spider Software & Team does not guarantee any specific outcome or profit from the use of the information provided in this Blog. It is the sole responsibility of the viewer to evaluate their own financial situation and to make their own decisions regarding any investments or trading strategies based on their individual financial goals, risk tolerance, and investment objectives. Spider Software & Team shall not be liable for any loss or damage, including without limitation any indirect, special, incidental or consequential loss or damage, arising from or in connection with the use of this blog or any information contained herein.
