Advantages and disadvantages of taking loans against shares by promoters in a listed company.

Generally, wherever the promoter decides to set up another venture, funds are required as promoter's contribution. Advantages of taking loans against shares by promoters in a listed company Funds can be raised easily because the shares have liquidity and are easily saleable valuation is determined based on market price. After hair cut/margin loan against equity is granted by Banks, NBFCs or other entities. Large funds can be raised. Share are pledged in favour of lender but voting rights remain with the promoter. Promoter can make repayment based on the availability of funds. Disadvantages of taking loans against shares by promoters in a listed company If the market price of the share goes down, the margin has to be maintained. The shortfall is to be met by either additional pledge of shares, or by making repayment of loan to the extent of shortfall. In case the promoter is not able to fulfil his commitment, the lender has a right to sell the shares to the extent of short fall as per terms and conditions of agreement. Such large scale sale may result into further downtrend in the stock market, thus creating further shortfall. This situation does not leave any room sometimes with the promoter and the confidence of its shareholders goes down. Multiplier impact worsen the situation. The promoter has to be disclose details of pledge of its equity and all charges. A higher percentage of pledge may result into confidence shake of the investors.