Scores of medium-sized companies' promoters face the risk of losing their pledged shares for failing to meet margin calls like Orchid Chemicals' Raghavendra Rao in 2008, as the Bombay Stock Exchange'smid-cap gauge has lost nearly a quarter of its value since peaking in November.
A few days of rally, such as the one on Monday when the BSE's Mid-Cap Index rose 3.5%, could prevent a sell-off though.
Promoters of Unitech, once the second-biggest real estate developer, were on the verge of losing some of their shares, but salvaged the situation at the last moment before the lenders sold them off. There have been a couple of such instances, but the companies involved have been very small.
"The worry about company promoters facing margin calls for their pledged shares is very real because funding has tightened in the last three months," said Saurabh Mukherjea, head of equites, Ambit Capital.
"If the market sees another major sell-off, the situation could turn worse especially for those promoters who have already pledged a sizeable chunk of their holdings."
Promoters of companies during a bull run are lured by lenders with attractive funding against their shares. They use these funds to build more factories, or just to speculate in the market. Initially, they reap big trading profits, but when the market turns around, some, such as Vijay Sheth of Great Offshore, are so highly leveraged that they lose their companies built over decades.
The speculation about companies were so rife in the last bear market that the Securities and Exchange Board of India , or Sebi, mandated promoters to disclose their pledges.
The recent crash has led to many lenders seeking more collateral since the value of the assets pledged have eroded in the sell-off in the last two months as foreign funds pulled out about $1.5 billion.
Recently, Morgan Stanley decided to sell property developer Unitech's shares after the company founder's entities could not bring in more shares to make up for the short-fall in margin.
"Pledged shares of many promoters are close to their threshold limit of margin calls," said an executive at a lender who did not want to be identified.
"Any sharp fall from these levels can trigger selling.We have already asked some promoters to ready up to meet additional margin calls."
Four leading brokerages suffered losses after funding entities of a Mumbai-based entertainment company, whose shares tumbled in the recent sell-off.
They had lent about Rs150 crore against shares that were then valued at Rs 300 crore. When the value of the collateral fell in the wake of the recent market fall, these friendly brokers could not bring in more shares.
Part holdings of a Chennai-based media company's promoter were also sold off by a New Delhi-based lender recently for failing to bring in additional margins.
"Whenever there is a 10-15% fall in the markets, there is always margin pressure for stocks pledged in the mid-cap space," said Avnash Gupta, VP-research, Bonanza Portfolio.
"Apart from promoters, many high net worth investors also take positions in the market against their shares. As of now, there are not many companies under severe pressure from selling apart from companies in the real estate sector, whose balance sheets are strained. Investors should stay away from companies where promoter holding is low and high percentage of shares are pledged."
A few days of rally, such as the one on Monday when the BSE's Mid-Cap Index rose 3.5%, could prevent a sell-off though.
Promoters of Unitech, once the second-biggest real estate developer, were on the verge of losing some of their shares, but salvaged the situation at the last moment before the lenders sold them off. There have been a couple of such instances, but the companies involved have been very small.
"The worry about company promoters facing margin calls for their pledged shares is very real because funding has tightened in the last three months," said Saurabh Mukherjea, head of equites, Ambit Capital.
"If the market sees another major sell-off, the situation could turn worse especially for those promoters who have already pledged a sizeable chunk of their holdings."
Promoters of companies during a bull run are lured by lenders with attractive funding against their shares. They use these funds to build more factories, or just to speculate in the market. Initially, they reap big trading profits, but when the market turns around, some, such as Vijay Sheth of Great Offshore, are so highly leveraged that they lose their companies built over decades.
The speculation about companies were so rife in the last bear market that the Securities and Exchange Board of India , or Sebi, mandated promoters to disclose their pledges.
The recent crash has led to many lenders seeking more collateral since the value of the assets pledged have eroded in the sell-off in the last two months as foreign funds pulled out about $1.5 billion.
Recently, Morgan Stanley decided to sell property developer Unitech's shares after the company founder's entities could not bring in more shares to make up for the short-fall in margin.
"Pledged shares of many promoters are close to their threshold limit of margin calls," said an executive at a lender who did not want to be identified.
"Any sharp fall from these levels can trigger selling.We have already asked some promoters to ready up to meet additional margin calls."
Four leading brokerages suffered losses after funding entities of a Mumbai-based entertainment company, whose shares tumbled in the recent sell-off.
They had lent about Rs150 crore against shares that were then valued at Rs 300 crore. When the value of the collateral fell in the wake of the recent market fall, these friendly brokers could not bring in more shares.
Part holdings of a Chennai-based media company's promoter were also sold off by a New Delhi-based lender recently for failing to bring in additional margins.
"Whenever there is a 10-15% fall in the markets, there is always margin pressure for stocks pledged in the mid-cap space," said Avnash Gupta, VP-research, Bonanza Portfolio.
"Apart from promoters, many high net worth investors also take positions in the market against their shares. As of now, there are not many companies under severe pressure from selling apart from companies in the real estate sector, whose balance sheets are strained. Investors should stay away from companies where promoter holding is low and high percentage of shares are pledged."
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