Pledging of Shares by TATA Group

Tata group firms Tata Teleservices (Maharashtra) Ltd, Tata Power Ltd and Tata Steel Ltd were among companies which disclosed on Monday that their founders had pledged shares to raise money, even as it became clear that at least some of the lenders have securitized the debt.

That would mean the shares may be sold in the market if the promoters default on payments or offer more shares as collateral, or so-called margin, to make up for the sharp fall in share prices.

Tata Teleservices (Maharashtra) revealed that its promoters had pledged 942.8 million shares, or 49.7% of its equity. The shares were worth Rs2,173.9 crore at Monday’s closing price on the Bombay Stock Exchange. Tata Steel said its founders had pledged 96.4 million shares, or 13.19% of the equity. The shares were worth Rs1,922.93 crore at Monday’s closing price. And Tata Power disclosed that its promoter Tata Sons Ltd, the holding company of the Tata group, had pledged 32.3 million shares, or 14.59% of the total equity. This was worth Rs2,173.23 crore at Monday’s prices. Several Tata firms have taken on debt to pay for overseas acquisitions.

The three Tata firms are among at least 100, many of them small and mid-sized, that have thus far declared that their founders or promoters have pledged their shares.

The disclosures are in line with a recent instruction from regulator Securities and Exchange Board of India (Sebi). Firms were continuing to make the disclosure till late Monday. At last count, the value of the pledged shares was Rs10,367.74 crore.

Typically, all such loans are given against collateral and, in a falling market, promoters need to pledge more shares to keep this intact.

In one such case, a mutual fund participating in a securitization programme sold part of the promoter’s stake in a large Indian drug maker in the open market, pulling down the stock significantly, an investment banker, who did not want to be identified, said. The promoter had originally taken loans from two lenders, pledging shares. The lenders, in turn, securitized the debt.

According to at least six investment bankers and mutual fund managers, none of whom wanted to be identified given the sensitive and confidential nature of such transactions, a few banks have securitized loans against shares through debentures and so-called pass through certificates (PTCs). Mutual funds cannot lend but can invest in debentures or PTCs, which are nothing but fixed-income securities.

“Typically banks do this (securitization) through creation of a special purpose vehicle and in case of a default, the shares can be sold,” said the CEO of a Mumbai-based mutual fund who did not want to be identified. Unlike lenders, who often have a long-term business relationship with the promoters, mutual funds can immediately sell the shares in case of a default.

Banks are also syndicating such loans to promoters. In a loan syndication, one bank issues the loan against shares in the first stage. In the second stage, it sells part of its exposure to other banks. Banks securitize and syndicate loans to free up their capital.

Under banking norms, for every Rs100 worth of loans, banks need Rs9 of capital. So, when the amount of loan that a bank takes on its own book goes down, the capital requirement too comes down.

Apart from Tata Steel and Tata Power, the only constituent of the National Stock Exchange’s 50-stock Nifty index to have revealed till late Monday that its promoters had pledged shares was Dr Reddy’s Laboratories Ltd. Promoters of the Hyderabad-based drug firm have pledged 6.9% of their shares. At Monday’s closing price, the value of this stake is Rs481 crore.

“Promoters of large firms, including one of India’s biggest conglomerates, have actively pledged shares but they may not make public announcements immediately,” said a senior executive at large foreign brokerage, a little before the Tata firms made their disclosure.

In a circular last week, Sebi made it mandatory for companies to disclose details of shares that had been pledged by promoters.