What is pleading of share and how its affect company

shares pledging how does it work,  here is all you need to know about pledged shares. 

Promoter pledged shares: Boon or bane for investors

What does  shares pledging mean?

When one takes loans against the shares held, it is called pledging shares. This means that shares are offered as collateral or security against the loan taken by the individual that has pledged his/her shares. Shares can be pledged by a promoter or an investor.There are different reasons why promoters pledge shares. Normally, promoters pledging shares to meet temporary bridge financing requirement is understandable. Quite often promoters use the shares as a temporary pledge and exit the pledge by repaying the loan.

What happens in the event of default by a borrower?
If the value of shares falls below the minimum value agreed between the borrower and lender, the latter can sell off the pledged shares and recover money.

When a margin call is triggered, the borrower must either deposit more cash or securities with the lender as additional collateral or sell the shares pledged to settle the loan. A forced sale of pledged shares could create a vicious cycle, resulting in the company’s share price falling even further.

Note:  Investors need to be cautious when promoters start using pledged shares to get working capital funding from banks and finance companies. That is a sign of stress on the balance sheet and investors must be cautious.

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