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NISM Certifications · NISM-Series-XV: Research Analyst · Company Analysis - Business and Governance

While evaluating a company, an analyst finds that promoters have pledged a large and rising share of their holding as collateral for loans. What is the main risk this signals for minority shareholders?

High promoter pledging is risky because a falling share price can trigger margin calls, and if promoters cannot top up collateral the lenders may sell the pledged shares. This causes further price falls and possible loss of promoter control, hurting minority shareholders.

  1. APromoters will receive higher dividends from the pledged shares
  2. BA fall in the share price may trigger margin calls and invocation of the pledge, causing forced selling and loss of promoter controlCorrect
  3. CThe company will be automatically delisted from the stock exchanges
  4. DThe pledged shares are cancelled, reducing the total share capital

Explanation

If the price falls, lenders may demand additional collateral. Failure to provide it can lead to invocation and sale of pledged shares, pushing the price down further and possibly changing control. Pledging does not cancel shares, raise dividends or cause automatic delisting.

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