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Discuss the concept of what Share pledging; explain why it is an important tool in gauging a company’s financial health.

Topic:  Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth.

5. Discuss the concept of what Share pledging; explain why it is an important tool in gauging a company’s financial health. (250 words)

Reference: The Hindu

Why this question:

The Securities and Exchange Board of India (SEBI) has amended the SEBI (Depositories and Participants) Regulations by including an additional explanation that states that ‘pledge’ would also refer to ‘re-pledge of securities for margin or settlement obligations.’

Key demand of the question:

The answer must discuss about the move; benefits and significance; about share pledging.

Directive:

Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.

Structure of the answer:

Introduction:

Define what is meant by Pledging of shares.

Body:

  • What is a pledged share? – Simply put, it is taking loan against the shares one holds. It can be done by both investors and promoters.
  • Why do promoters pledge shares? – One of the methods promoters use to raise finance is to take loans against their holding in their company from banks or non-banking financial companies. For these financial institutions, these shares are collateral. Promoters can raise funds for various reasons-for meeting requirements of the business or personal needs.
  • What are the risks involved for the retail investors? – explain.
  • Highlight the changes made recently; Onus of bonafide pledge created from margin account of a stock broker will now lie with the depository following the SEBI amendment.
  • Discuss how all this helps gauge the financial health of any company.

Conclusion:

Conclude with the likely benefits of the move.