Collateral or contagion? The risks with pledged shares

Hello,

This week, Emirates NBD announced it was set to acquire a majority stake in RBL Bank for $3 billion, in what would be the biggest FDI banking acquisition in a while.

Meanwhile, the bankruptcy court approved Future Supply Chain Solutions’ acquisition by Reliance Retail, a significant distressed deal in logistics.

And finally, Singapore Keppel takes full control of Cleantech Solar after buying Shell’s 49% stake, reflecting strategic consolidation in clean energy.

I hope you enjoy this week’s roundup — please connect on LinkedIn to discuss your next M&A deal.

Let’s dive in.

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Market Trends

Leverage returns to the boardroom

First a reminder. In 2010, the Dodd–Frank Act asked the SEC to define rules around insider share pledging, or loans against securities (LAS), but specifically company shares – when executives or business owners borrow against their own stock. 

Fifteen years later, the US agency still hasn’t. Into that vacuum, proxy advisors like Institutional Shareholder Services (ISS) and Glass Lewis stepped in with their own soft laws encouraging corporate boards to justify, monitor, or ban pledging altogether.

The practice can be harmless as a means to diversify wealth or fund liquidity needs, until falling share prices trigger margin calls – the margin on a loan increases when a borrower is downgraded on the principle that higher risk should equal higher returns for the lender, compelling insiders to sell in panic and crash their own stock. 

The dotcom bust, the Great Recession, and the disruptions of the Covid-19 pandemic – all revealed how billions can be wiped out and companies lose governance credibility after margin-triggered fire sales.

By 2012, US financial advisors were urging investors to vote against directors who pledged stock. However, by 2015 policy evolution reflected a softening from outright prohibition to a case-by-case review that weighs how much stock is pledged, how volatile the company’s shares are, and whether insiders have disclosed these risks transparently.

Why the resurgence? 

Two drivers: rich public valuations that make shares attractive collateral, and constrained bank balance sheets that have pushed promoters toward NBFCs (non-bank financial institutions), private credit and structured lenders. Firms like Bajaj Finance, 360 ONE and Nuvama have expanded LAS exposure; offshore credit houses are also participating via trustee structures. That expands supply – and complexity.

Perhaps, the US is hands-off now, but India’s economy is not bottomless like the US’s seems to be (the difference in size between the US economy and the next-largest economy, China, is roughly $11 trillion in nominal GDP terms).

Corporates borrowing against their own stock remains under-regulated. But if this behaviour proliferates in Indian boardrooms, will the country’s regulators be ready to confront the governance challenges that come with financial leverage built on equity valuations.

Regulatory guardrails exist. RBI maintains minimum margin norms (50% for advances against shares) and restricts banks from financing buy-backs or holding equity beyond prescribed thresholds. NBFCs face LTV (loan-to-value) and reporting requirements, but their perimeter is wider, letting them finance unlisted, promoter holding companies with larger haircuts and bespoke covenants.

Lending against shares by Indian NBFCs dominates this market currently, whose advances against shares were approximately ₹22,000 crore ($2.64 bn) in 2024, versus roughly ₹9,700 crore ($1.6bn) for banks, as per RBI. And this trend is set to grow as RBI allows Indian banks to participate. Previously only NBFCs and foreign lenders could.

Promoters are using non-bank credit rather than traditional lenders for liquidity. Recent exchange disclosures show extreme concentrations in large caps such as Vedanta, Hindustan Zinc and Oberoi Realty, with pledges exceeding 50% and in several cases north of 90%. 

This table shows top-listed companies by market cap and pledged percentage. Those figures are not merely academic but change control risk, margin sensitivity and recovery.

A separate view of the market, with companies ranked by the proportion of pledged shares, highlights the tail risk. Smaller names whose promoters have effectively encumbered near-total holdings. 

These securities are the most price-sensitive; and a modest drop can force multiple margin calls and cascade selling across correlated lending books.

Contagion risk?

Advisors, consultants, and the financial regulators have all shaped this debate, encouraging clarity in pledging policies as to their purpose (an education or a home loan, for medical emergencies only, for example); with caps on the trading value of pledged shares as a percentage of total outstanding equity; monitoring board-level oversight and progress disclosure on reducing pledged shares; and robust compliance such as excluding pledged shares from ownership targets.

High pledge percentages amplify downside correlation between promoter stress and market value. In M&A or recap deals, pledge data now routinely shifts pricing, covenant design and escrow requirements. Private-credit shops prize the yield; acquirers discount for execution risk.

LAS delivers liquidity without immediate dilution, but when leverage stacks on equity valuations the structure is fragile. 

Best to keep in mind that pledged shares are collateral, but also a contagion channel.