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Always avoid companies where promoters are increasing their pledged shares. Investor should keep a close watch on the percentage of shares promoters have pledged. An increase in pledged shares may devastate the earnings of the company, thus leaving not room for earnings 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.
Most of the companies with high percentage of promoters pledging, generated a negative return for investors.
You will find that many of these companies witnessed further decline o 70-90% in their stock price. A few of them tuned bankrupt and acquired by other payers, leaving nothing for pervious shareholders.
Avoid companies where prompters pledge more than 30% of the holdings and the pledged percentage is increasing.
