Pros and cons of promoters pledging their shares

Pros and cons of promoters pledging their shares.
A study based on disclosures made by 467 listed firms’ shows the promoter group has pledged more than 90% of its holding in 27 companies.
Promoters of another 38 companies, including realty firms Unitech and Parsvanath besides other large firms such as Tata Teleservices and India cements capital, have pledged over 70% of their holding in the company. When the promoter group pledges a high proposition of its shares, the firm is vulnerable to management change, although so far there just 3 cases, including Satyam of a promoter actually losing control as a result of pledging shares. Resultant, SEBI made it mandatory for listed companies to disclose details of pledged shares.
Usually a lender gives a loan worth 60% of the value of shares and if the share prices fall, a margin call is triggered. There is a risk of management change if the quantum of shares pledged is high.
Some promoters may also be tempted to manipulate profits of the company to keep the share prices inflated and avoid triggering selling of shares.
Most of the pledged companies have not disclosed either the object or the institutions with which shares have been pledged. Shares owned by promoters are pledged for their personal borrowings or as collateral with banks and other financial institutions against borrowings by the company. If the value of shares drops significantly, as is today, banks ask for more shares or some other collateral. If the firm or the promoter fails to furnish the extra amount the lenders can sell the shares in the market.
Some firms also say that there is not a significant risk of sale of such shares in the market. Consider the case of power firm JP Hydropower where promoters have pledged about 59% of their total 63% in the company says that the pledged shares are only secondary securities. The primary security is the project for which finance is made available.
Shares owned by promoters are pledged either for their personal borrowings or as collateral with banks and other financial institutions against borrowings by the company.
Usually a lender gives a loan worth 60% of the value of shares and if the share price falls, a margin call is triggered and the lenders can sell the shares off.