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Always avoid companies where promoters are increasing their pledged shares. Investor should keep a close watch of the percentage of shares promotes have pledged. An increase in pledged shares may devastate the earnings of the company, thus leaving no room for earrings growth. High debt follows high pledging of shares. So, a major part of the profit goes in paying the lenders. It affects the retail investors by minimizing or eliminating the option of sharing dividends. Pledging of shares puts unnecessary risk on the stock price. Even a quality business can become a victim of such a situation. A sudden crash in the stock price is quite common due to high pledging of shares. So, why should you take such a risk? It is better to avoid such stocks.
Following is the list of companies of 2014 with the highest and increased pledging of promotes share. Every company on the list underperformed the market over a one year and three years period. Throughout 2014, equity market experienced strong bull run despite that, most of the companies with high percentage of promotes pledging, generated a negative return for investors.
