ICICIdirect research says that with stock prices having fallen significantly over the past few months, several firms that have pledged their shares would have to top up the margin requirements, failing which lenders could sell the shares leading to a further drop in prices
The significant erosion in the value of shares in the market fall over the past few months, will require promoters who have pledged shares for loans to increase the quantum of pledged shares to maintain the margin requirement, according to a research report by ICICIdirect.com.
The Sensex has corrected by more than 10% over the past few months and the value of shares of most companies has fallen. The research report suggests that in the event that promoters default in fulfilling the margin requirements, this could result in the sale of pledged shares by the lenders and could cause a further decline in the share prices and promoters’ holdings. This in turn could pull the market further downward.
ICICIdirect estimates that on an average 8%-9% of the promoters’ shares has been pledged during the period March 2009 to March 2011.
Most promoters pledge shares to raise working capital or to bring in new investors. This is a method of taking a loan against shares, where the value of the promoters shares pledged is two to three times of the loan amount sought.
As for the lenders, if the company’s share price goes below a certain level, the company will have to make immediate payment in cash or pledge more shares. If the company cannot do this, the lenders will sell the shares to recover the money.
This may appear beneficial to both promoters and lenders, as the promoters have an easy way to raise capital and the lenders have the right to sell the shares, whose value is about twice the loan amount if the promoter defaults or if the value of the pledged shares fall.
Though promoters pledge shares on a regular basis, this may not be a very good sign. This implies that the company’s financials are weak as it is cash-strapped for even working capital and the only way it can raise money is through pledging its shares. Consequently, the share price of a company usually falls after the announcement of shares being pledged.
An example is Malwa Cotton which has increased the quantum of shares pledged by 44% from the December 2010 quarter to the March 2011 quarter, while the company’s share price has dropped by 27% from Rs51.85 on 31 December 2010 to Rs38 on 24 May 2011.
Royale Manor is another company that has increased the number of shares pledged by 39% in the last quarter-on-quarter period, while the company’s share price has lost 25% in five months. (See table, 'Shares Stumble'.)
Employees subscribing to provident fund have not been able to exploit the entire benefit due to cumbersome procedure and a general lack of awareness of the rules. Now, through the efforts of experts and the organisation, much could change
Provident fund in India is a well-known concept for income security. But despite it being in existence since a long time, there is a lack of transparency. Many of us have little knowledge about our provident fund (PF) account. Experts are demanding a change in the PF policy, to make it more employee-friendly.
The Employees' Provident Fund Organisation (EPFO), India, is the largest governing body of provident funds. Contributing to the employees' provident fund (EPF) account is easy, but the withdrawal process is harrowing.
Let alone clueless employees, even the human resources departments of many private organisations are quite unaware of the EPF rules and regulations. For instance, they don't know that an employee could contribute more than the standard provident fund amount deduction, although the employer will not increase his share of the contribution.
Industry experts are also demanding one standard EPF account number for each employee throughout his/her career. Currently, when an employee shifts an organisation, he/she is given a fresh account. A standard provident fund number would ensure that the contributions are not spread over different EPFOs and would at the same time earn good compounded returns, with the interest rate at a high 9.5%.
Speaking to Moneylife YS Kataria, director (media and communication), Ministry of Labour and Employment, said, "We are working on a process where all the account holders will be provided with a unique EPF number, like the unique identification number. This process will be worked out in the next six months."
At the time of withdrawal, an employee needs to go to his previous employer. And the local provident fund office directs the employee to the EPFO where the establishment is registered. Experts say, "The PF should be accessible through the local provident fund office and the employee should not have to go through the human resources department of the previous organisation."
This issue could be resolved shortly, as the EPFO announced recently that subscribers of EPFO would soon be able to monitor their accounts online. "The employee would not have to go back to his previous employer once the EPF subscriber can see his account details online," Mr Kataria explained.
Many people are generally uninformed about their EPF contribution. This results in the premature closure of the account as they don't want to go to their previous employer and they are also unaware of the procedures. Even the EPFO has decided to stop interest payment on the employee PF accounts where there is no activity seen over a prolonged period. In this matter, industry analysts believe that premature withdrawal of funds should be charged a penal interest and employees should be made aware of the importance of continuing the account to avail of better returns later on.
The most common complaint against the EPFO is that account holders do not get any answer to their queries. But consumer activists point out that the problem can be overcome by the account holder invoking the Right to Information (RTI) Act to get details of the EPF account, without having to go to the EPFO office.
Experts also point out that sending periodic statement details of the PF account to contributors, even if the account is in another city, would ensure better transparency.
Other initiatives, like educating people through vernacular advertisements about the rules and regulations of EPF and providing a smart-card option, would also help people to understand better about the PF policy.
"We have initiated a lot of awareness to discourage premature withdrawals. Also with all the details being made available online, such problems will be reduced," Mr Kataria said.
Earlier, the then oil minister Murli Deora was accused of delaying approval for the transaction, but he moved to the corporate affairs ministry in late January and there is still no sight of a decision
New Delhi: A ministerial panel is likely to decide tomorrow if the government should approve Cairn Energy's sale of stake in its Indian unit to mining group Vedanta Resources with conditions or without any precondition, reports PTI.
The Group of Ministers (EGoM) headed by finance minister Pranab Mukherjee is scheduled to hold its first meeting at 1630 hours on 27th May, an oil ministry official said today.
The Cabinet Committee on Economic Affairs (CCEA) had on 6th April asked the GoM to vet the $9.6 billion deal, but the panel has not held a single meeting in seven weeks since then.
Earlier, the then oil minister Murli Deora was accused of delaying approval for the transaction, but he moved to the corporate affairs ministry in late January and there is still no sight of a decision.
Industry sources said they were apprehensive about the prospects of the GoM arriving at any decision tomorrow as key oil ministry officials—special secretary PK Sinha and joint secretary exploration DN Narasimha Raju—who have been dealing with the subject for the past nine months, are on official tour abroad.
Oil secretary GC Chaturvedi, who came to the ministry of petroleum and natural gas only this month, is still grappling with the subject while oil minister S Jaipal Reddy is also relatively new to the job.
Sources said things have also become complicated for the GoM after Solicitor General Gopal Subramaniam reaffirmed his earlier opinion that the government can impose preconditions like asking Cairn or its successor to share cess and royalty with state-owned Oil and Natural Gas Corporation (ONGC) in the all-important Rajasthan block.
In his second opinion, which was sought by Mr Mukherjee, the SGI said, “The government is not bound to grant consent ipso facto or mechanically.”
The precondition that Cairn/Vedanta agree to cost-recovery of Rs18,000 crore in royalty that ONGC has to pay on the Rajasthan block would be “defensible on parameters of public and national interest,” the SGI said in the second opinion.
Sources said the GoM itself is split in the middle on the issue of treating royalty paid by ONGC as cost-recoverable from its revenues. While Mr Reddy has played it safe by giving an alternative to ONGC’s demand, which was originally made a month before the Cairn-Vedanta deal was announced in August last year, the law ministry and Planning Commission have backed making cost-recovery of royalty a precondition for approval.
The finance ministry is in favour of Mr Reddy’s second option of the government giving consent without any precondition and taking appropriate decisions to protect ONGC’s interests.
It remains to be seen if Mr Mukherjee will sideline the SGI opinion in approving the deal.
In his first opinion on 24th March, the SGI had categorically stated that the transfer of Cairn India shares to Vedanta should be allowed only if the latter agrees to preconditions on the deal.