A pledge of shares is an arrangement in which shareholders, often promoters, hand over their shares as security to a lender in return for a loan. The shares stay in the borrower’s name but are marked as pledged in the depository records, and the lender can sell them if the loan is not repaid or if the share price falls too far and the margin is not topped up. Pledging is not illegal and is common, but it adds risk to the company’s shareholders. If the share price drops, the lender may demand more collateral, and a forced sale of promoter shares can push the price down further, creating a spiral. A high percentage of promoter shares pledged is therefore seen as a warning sign, especially when the loan is not for the company’s business. Companies must disclose pledges in their quarterly shareholding pattern filings, and the offer document lists any shares that are pledged or encumbered. Under SEBI rules, promoter shares that are locked in at the time of the IPO can be pledged only to a limited extent for specific loans. Always check the pledge percentage when comparing IPO companies.
Example: A promoter owns 60 percent of a company and has pledged half of those shares for a loan. If the stock falls 40 percent, the lender can sell the pledged shares, which would increase the selling pressure on the stock.