ISB study calls for balanced stance on share pledging
Hyderabad: Policy makers and investors need to take a more balanced and contextual view on share pledging by family promoters rather than castigating the phenomenon, ISB appeals in a latest study. Pledging of shares is a way for the promoters of a company to get loans to meet their business or personal needs by keeping […]
Hyderabad: Policy makers and investors need to take a more balanced and contextual view on share pledging by family promoters rather than castigating the phenomenon, ISB appeals in a latest study.
Pledging of shares is a way for the promoters of a company to get loans to meet their business or personal needs by keeping their shares as collateral to lenders.
A research study, authored by Dr Nupur Pavan Bang, professor Sougata Ray, Nandil Bhatia and professor Kavil Ramachandran of the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB), highlights the prevalence of share pledging in the Indian context and the possible implications that pledging may present for stakeholders, especially in family firms.
Using data for 1,492 firms listed on the National Stock Exchange of India from 2009 to 2019, the study finds a decline in firm value, higher crash risk and underinvestment in innovation by firms where promoters of family firms pledge their shares. The study also shows how some firms have utilised share pledging by family promoters as a tool to raise capital for strategic projects and create value for the stakeholders.
The various scandals, loss of control of the firm by family promoters, regulatory responses and warnings led to the common perception that all share pledges by promoters are bad. Existing empirical research around pledging of shares is sparse and does not account for the heterogeneity among the possible use-cases of capital obtained from pledging of shares. The study calls for more nuanced studies on pledging to explore this anomaly contextually and to avoid painting all cases with the same brush.
Co-author, professor Sougata Ray explains that the commonly peddled negative narrative on pledging often dissuades fact based, informed, balanced, and nuanced debates on its utility, causes and consequences, backed by rigorous research in spite of its ubiquity in India and many other economies of the world.
The study showed that pledging of shares, coupled with bad decision-making and/or over ambitious growth plans, resulted in complete destruction of family wealth in many family firms. There is a need to create awareness and build stronger family governance processes that would put checks and balances with regards to excessive pledging.
Dr Nupur Pavan Bang said, “The study provides a clarion call for acknowledging that pledging is an important tool to access financial capital for family promoters. It is a legitimate way to raise entrepreneurial financing amongst family businesses and a source of funds to turnaround the family firm if it is in trouble.”
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