Pledged Shares

Nice article in moneycontrol on Pledged Shares
http://www.blogger.com/post-create.g?blogID=4747885867082820457

Typically, a promoter looking to raise money by pledging shares, has to deposit 2-2.5 times the value of the loan as collateral with the NBFC. Better the promoter/company’s track record, lower the collateral. Interest rates on loans to non-real estate companies vary between 14-18% and those for real estate companies could be as high as 18-22%.
The moment the share price weakens and the value of the collateral drops to say, 1.8 times the loan value, the lender will ask the promoter to either offer additional shares or repay a part of the loan. In market parlance, this is known as margin call. If the promoter is unable to do either, the lender will dump a part of the shares to recover his money. In a fragile market, this could very well set off a vicious cycle where the lender’s selling could push share prices further down, and trigger more margin calls.

Shares of firms with a significant chunk of pledged promoter holdings are vulnerable to attacks by cartels of bear traders. Where the stock is eligible for futures & options trading, these players hammer the price by short selling the stock futures. This in turn puts pressure on the stock price, and triggers margin calls from lenders. If the promoter is financially weak, he will be unable to meet the margin calls, causing lenders to dump the shares.