Real estate promoters increase their stake as share prices continue their freefall

Amidst a challenging business environment and falling share prices, promoters of real estate companies have shown faith in their businesses by increasing their shareholding by up to three per cent this financial year.

However, poor cash flows and high debt have made their lenders jittery. While some have raised the collateral requirement for existing loans, margin calls resulting from falling share prices have also led to additional pledges.

Real Estate majors Parsvnath Developers, Nitesh Estates, Orbit Corporation, Peninsula Land and Sunteck Realty are among the entities which witnessed promoters raising stake in the company over the past six months.

Pradeep Jain’s Parsvnath Developers has witnessed a continuous rise in promoter holding since March, from 67.66 per cent to 70.16 per cent at September-end. Rajeev Piramal, promoter of Peninsula Land, took his holding to 55.72 per cent in June as compared to 55.18 per cent at March-end.

Kamal Khetan, promoter of Sunteck, said, "We have been doing creeping acquisitions and our financial institutions’ holding is always around 14.5 per cent. The company's promoters hiked holding to over 70 per cent from around 67 per cent."

Pujit Aggarwal of Mumbai-based Orbit, who raised his holding from 46.99 per cent in June to 47.51 per cent in September, said: “We have been increasing our stake and are trying to bring down our share pledging. Though the stock has fallen significantly in the last one year, we are hoping things will improve from the next quarter. Even FIIs (foreign institutional investors) have started looking at us, so we are hopeful.”

Normally, buying back of shares from the open market is considered a positive indication. But, analysts are not very bullish, as a significant portion of these shares are marching to the financial institutions to meet additional margin requirements. Earlier, realty developers had to provide collateral worth three times the loan. Now, bankers are asking for collateral of up to five times against existing loans, say experts.

“Cash flows are drying up, while debt is on the rise for the sector. As stocks have plunged, triggering margin calls, promoters need to pledge more shares as collateral with the lenders,” said an analyst.

For example, Jain of Parsvnath had pledged 86.47 per cent of his promoter share as of June. After raising his stake, the pledge came down to 71.24 per cent of his holdings at the end of September.

Last month, he pledged an additional 16.4 per cent to various funds. Similarly, Piramal’s pledged shares more than doubled to 26.75 per cent at the end of September, against 13.35 per cent in June.

In Bangalore-based Nitesh Estates, too, while the promoters' stake rose from 43.64 per cent to 44.15 per cent in the September quarter, promoter Nitesh Shetty pledges had increased to 29.42 per cent of his holding by then.

The head of investment banking at a financial firm says, “Developers need to cut their debt and start selling their inventories. These developers are increasing stake just to pledge these against the old debt. A fresh loan is difficult for them. Unless they have a good relationship, bankers are unlikely to lend further.”

PLS Note- This story has been published by my employer Business Standard Ltd.