SHARE PLEDGING AND ITS CONSEQUENCES: A STUDY OF INDIAN FIRMS

“Policy makers and investors need to take a more balanced and contextual view on share pledging by family promoters rather than castigating the phenomenon.”

A research study, authored by Dr. Nupur Pavan Bang, Professor Sougata Ray, Nandil Bhatia and Professor Kavil Ramachandran of the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business (ISB), highlights the prevalence of share pledging in the Indian context and the possible implications that pledging may present for stakeholders, especially in family firms.

Using data for 1,492 firms listed on the National Stock Exchange of India from 2009 to 2019, the study finds a decline in firm value, higher crash risk and underinvestment in innovation by firms where promoters of family firms pledge their shares. The study also shows how some firms have utilized share pledging by family promoters as a tool to raise capital for strategic projects and create value for the stakeholders.

The various scandals, loss of control of the firm by family promoters, regulatory responses and warnings led to the common perception that all share pledges by promoters are bad. Existing empirical research around pledging of shares is sparse and does not account for the heterogeneity among the possible use-cases of capital obtained from pledging of shares. The study calls for more nuanced studies on pledging to explore this anomaly contextually and to avoid painting all cases with the same brush.

Co-author, Professor Sougata Ray explains that “the commonly peddled negative narrative on pledging often dissuades fact based, informed, balanced, and nuanced debates on its utility, causes and consequences, backed by rigorous research in spite of its ubiquity in India and many other economies of the world. Along with large sample data driven research, there is a need for case study based research on pledging in order to understand the variations of the same.”

The study was released in a webinar in the presence of Dr. Satyanayana Chava, Founder and CEO, Laurus Labs; Professor Prasanna Tantri, Executive Director, Centre for Analytical Finance, ISB; the authors of the study; and industry stakeholders. It has important implications for investors, regulators, board of directors, and even family members. Pledging of shares, coupled with bad decision-making and/or over ambitious growth plans, resulted in complete destruction of family wealth in many family firms. There is need to create awareness and build stronger family governance processes that would put checks and balances with regards to excessive pledging.

Speaking at the webinar, Dr. Nupur Pavan Bang said, “The study provides a clarion call for acknowledging that pledging is an important tool to access financial capital for family promoters. It is a legitimate way to raise entrepreneurial financing amongst family businesses and a source of fund to turnaround the family firm if it is in trouble. Policy makers and investors need to take a more balanced and contextual view on share pledging by family promoters rather than castigating the phenomenon.”

The study lists important implications for stakeholders of family firms, such as, promoters, family members of the promoting family, investors, the firm’s board of directors, and the regulators. A few of them include:

-        Over-optimistic investment plans and over-pledging of shares by the promoters, without pre-planned repayment strategies, are likely to lead to a crisis later.

-        Investors must keep a track of their portfolio and regularly evaluate if the controlling shareholders of the firms in which they have invested have pledged their shares.

-        Board of directors of firms must caution controlling shareholders from over pledging their stakes and should shield the firm from such shareholders if they try to manage the margin calls by taking hasty or short-term view decisions in the firm.

-        The study also has insights for the regulators such as the RBI and SEBI to take more balanced view of pledging when making policies.

-        Further, there is need to create awareness and build stronger family governance processes that would put checks and balances with regards to excessive pledging.

A generational shift in purpose and influence

Women constitute 18 percent of family business leaders globally. The highest percentage belonging to family businesses in Europe and Central Asia. Traditionally, women have been relegated to “invisible” role in the family businesses in administrative duties, or as informal advisors or to exclusively managing the household. However, the role of women in family business has been evolving over the last few decades.

The STEP Project Global Consortium and KPMG Private Enterprise surveyed over 1,800 family businesses from 33 countries across the globe, to reflect upon how demographic shifts are changing the role of women in family businesses – the value that women contribute, the various forms of influence they may have on the success of their businesses and the families and the unique competitive advantages they can deliver. Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business being the only member from India conducted the survey in India with responses from 53 companies across both manufacturing and services sectors.

The report finds that women in family businesses are slowly breaking the stereotype and engendering greater diversity at the workplace. Though women continue to face the dilemma and role conflict, they are equipping themselves to balance the obligations at work and at home. “Both men and women contribute to gender stereotyping and hence they need to work together and clearly define the roles, responsibilities and communicate to all stakeholders”, said Dr. Nupur Pavan Bang. “Organizational practices and policies are required that promote fairness and minimize bias”, she further adds. Some of the salient findings of the report are: 

Emerging from the shadows: Women are now equipped with the required education and training and actively taking up positions of power, authority, and decision-making roles in the family business. They are taking up leadership positions in the so-called masculine industries such as manufacturing, mining, and construction. 

The ‘hidden’ CEO: The societal and cultural bias have women play the role of a chief emotional officer. They are required to nurture and take care of the emotional needs of the family, keeping the family together and perpetuating the family’s values and traditions across generations. Instinctively, these unique characteristics make women holistic leaders with unique management styles and are an asset to the organization. 

Redefining “women’s work”: Women in family businesses, especially Millennials, are breaking down the barriers and redefining how women in non-traditional businesses are perceived. Many highly competent women leaders are successfully managing their family businesses in male-dominated industries such as steel and scrap-metal processing, cement manufacturing and the production of hardware products. They have the knowledge, experience and skills in their business and are valued and respected by the employees and customers. 

Transformational power of women: Though women continue to face role conflicts, they are able to balance the need at the workplace and at home. They have sophisticated and transformational leadership style, judgement, and unique outlook. 

Succession by merit: Traditionally in family businesses, succession is based on primogeniture, which discourages women to consider professional careers in their family’s business. However, certain country level rules such as gender equality movements and one-child policy in China have given women better access to resources. Family firms’ decision on succession are increasingly being driven on merit and capability instead of gender. 

Societal change and family business leadership: There has been a push from governments around the world to address the issue of under-representation of women in business. For example, In India, the amendment to the Hindu Succession Act in 2005 conferred property rights to daughters (married or unmarried) and granted them equal rights as the sons. Also, the mandatory gender quota for women on corporate boards introduced by the Companies Act (2013) prompted family firms to have higher percentage of women representation on the boards as compared to non-family firms. However, most of the family business leaders believe that quotas are not the answer and only help to generate awareness of the existing bias. 

Outdated mindsets: Women in family businesses can bring about the change in organization and society and help mentor, guide, and develop the pipeline for future women leaders. 

The findings of the survey are relevant to the family businesses in India too. Women in Indian family businesses have been breaking the various cultural and societal biases and perpetuating the businesses to new frontiers. Yet, in India, female participation in work force is decreasing and is one of the lowest in the world. India is placed at 95 out of the 129 member countries in the UN SDG gender index score and is ranked below the global average on gender equality. Women in family businesses are well placed to lead the way to bring about greater gender parity, offer and create opportunities for other women too. 

The editorial team behind the report comprised of Dr. Nupur Pavan Bang and Yashodhara Basuthakur (Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business), Andrea Calabrò, (STEP Global Academic Director & IPAG Family Business Institute, IPAG Business School), Mary Jo Fedy, Karmen Yeung and Tom McGinness (KPMG) amongst others.