Pledging of shares means taking Loan against the shares which one holds currently.This can be done by promoter and investors both.Shares which an investor owns are considered to be assets and banks consider them as a form of security to raise loans.When an investor buys shares from market then those shares are transferred to his demat account which are known as his demat holdings. These holdings are his clear holdings and there is no third party interest in those shares as investor has already paid the entire value of shares to buy them. When emergency occurs or market is highly volatile then shares can be pledged to Raise Funds. To pledge shares investor or promoter has to offer them as collateral to bank or non-banking financial institution for the exchange of loan.

Some important implications of pledging of shares

1) Companies which have high promoter holdings , pledging of shares is very common with them. When interest rates are rising then promoters tend to use their shares as collateral and raise funds using it. If large number of owners in a company tend to pledge shares then there is a possibility that it leads to volatile price movement when market falls.

2) Shares of companies which have high Pledged Shares often witness more volatility.As prices of shares falls the overall value of collateral also falls. In order to ensure that loan does not turn out to be a bad loan lenders may put pressure to sell some of the shares. If in case promoter or investor is unable to fulfill obligations of borrowed fund the ownership is transferred to the lender.

Reason because of which promoter or investors go for pledging of shares

Due to increased cost of borrowing, raising funds has become quite difficult. Also sometimes promoters are unable raise funds for important work like business expansion. Because of these reasons promoters find pledging of shares an efficient and convenient way to raise funds. Companies who are already under debt can not find any lender without collateral. For them this is the only way to further borrow money.

Pledging is not always a bad idea, it has some advantages as well. Like every individual needs home loans , personal loans, business loans to meet different needs, companies also needs to raise funds to carry out different operational and functional activities or for expansion purpose. Investors should look for percentage of pledged shares in a company and if it is somewhere between 2-8% it can be ignored. But do not prefer to invest in companies which have large percentage of pledged shares.

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