NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Business and Governance
A research analyst studying a promoter-led company notes that promoters have pledged a large and rising share of their holdings to lenders. Why is this a concern for minority shareholders?
High promoter pledging is a concern because a falling share price can trigger lender margin calls and invocation of the pledge, forcing share sales that deepen the decline and may dilute promoter control. It does not change dividends or authorised capital.
- APledged shares cannot be traded by anyone
- BIf the share price falls, lenders may invoke the pledge and sell shares, causing a further price fall and possible loss of promoter controlCorrect
- CPledging automatically increases the company's dividend payout
- DPledging reduces the company's authorised capital
Explanation
Lenders demand margin top-ups when the price drops; if the promoters cannot meet them, the pledge may be invoked and shares sold, pressuring the price and weakening control. Pledging does not affect dividends or authorised capital, and pledged shares can still be held and traded by others.
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