With turmoil in the market, investors are staring at a whopping Rs 1.67 lakh crore loss if they were to liquidate pledged shares from 314 firms due to liquidity constraints, as nearly 90 per cent of these stocks are heavily underpriced, rating agency India Ratings warned on Thursday.
A "quick exit" through liquidation for 314 stocks involving a total pledged share value of Rs 1,67,300 crore (Rs 1.67 trillion) will be difficult, the agency said in a statement.
"This is because their pledged volume is huge compared to the average daily trading volume and the perceived liquidity of shares as collateral may prove elusive when needed the most," it reasoned.
Investors could face heavy losses if these stocks are liquidated in the open market either for the final redemption or because of any covenant breach such as borrowers' failure to provide free shares in case of a price correction, it said.
The agency said these 314 stocks are a third of the total of 917 stocks having a pledged value of around Rs 1,88,400 crore (Rs 1.88 trillion) as reported on the stock exchanges.
Of these, in 59 cases with a pledged value of Rs 31,700 crore (Rs 317 billion), "promoters do not even have enough free shares to provide additional shares as collateral if the price corrects even by 20 per cent", it warned.
The agency added that in such transactions, borrowers are required to maintain a certain minimum collateral cover by providing additional shares in case the price drops and failure to provide additional shares may trigger liquidation.
Of the troubled companies, only 96 have sizeable market capitalisation whose shares have sufficiently high liquidity and the promoters also have enough free shares to provide a top-up for over 80 per cent drop in prices, it said.
Within this group, 82 have shown a satisfactory performance history to be considered as suitable collateral for the credit rating of 'A' or higher with a varying level of cover, it said.
