What is Pledging of Shares?
Pledging of shares is a financial arrangement where the owner of shares (usually promoters or large investors) uses their owned shares as collateral to obtain loans from banks or financial institutions.
In simple terms, just as you can mortgage a house or car to get a loan, pledging shares works the same way. Here, the shares you own are kept as a guarantee. You still retain ownership and may continue to receive dividends, but the control of those shares goes to the lender.
Why Are Shares Pledged?
Promoters or major shareholders may pledge shares for several reasons:
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Raising Funds for Business Needs
To start a new project, expand business operations, or meet working capital requirements, promoters can quickly secure loans by pledging shares. -
Personal Financial Needs
Sometimes, promoters or large shareholders may pledge shares to raise funds for personal purposes (e.g., big purchases or financial commitments). -
Repayment of Existing Loans
Pledging can be used to repay old debts by taking a new loan against shares. -
Margin Trading
Some investors pledge shares to raise additional funds for aggressive trading in the stock market.
What Are the Risks Involved?
Pledging shares also carries certain risks:
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Fall in Share Price
If the market price of the pledged shares falls, the value of the collateral decreases. The lender may then demand more shares to be pledged or ask for cash (this is called a margin call). If the borrower fails to meet the margin call, the lender can sell the pledged shares, leading to further price drops. -
Loss of Ownership
If the borrower defaults on the loan, the lender has the legal right to sell the pledged shares, resulting in the original owner losing ownership. -
Impact on Company Image
If a company’s promoters have a high percentage of pledged shares, it may indicate financial weakness. This could reduce investor confidence and negatively impact the company’s share price.
Summary:
While pledging shares can be a useful method to raise funds, it’s important to understand the associated risks. For investors, the percentage of promoter-held pledged shares is a key indicator of the company’s financial health and stability.
If the Share Price Rises After Pledging, Who Gains the Profit?
If You Pledge Shares and the Market Rises, Who Gets the Profit?
If you have pledged your shares and the stock market becomes bullish or the price of the pledged shares increases during that period, the profit belongs to you, the shareowner.
Pledging shares means you are using your shares as collateral to secure a loan, but the ownership of those shares remains with you. The lender only holds the shares as security.
Therefore, any capital gain resulting from the rise in share price belongs to you. Similarly, if the company declares a dividend during that time, you are still eligible to receive it as the rightful shareholder.
The lender’s right is limited to recovering the loan amount. If you repay the loan on time, the pledged shares will be returned to you, and you will enjoy all the benefits of the price appreciation. Only if you fail to repay the loan, the lender has the right to sell the pledged shares to recover the dues.
