Thursday, July 26, 2012

Why this Sell a wary, sellawary di...!!

What sparked the sell-off in midcap companies' shares today

Talk in the market is that a couple of brokers who are facing a liquidity crisis have sold pledged shares of companies, triggering a sell-off in the shares of nearly a dozen mid-cap companies.

Last year in November, stocks of many mid-cap companies fell as much as 50% as many non-banking finance companies dumped shares pledged by promoters with them. The promoters had raised money from these NBFCs by pledging* their shares, and when the promoters failed to put up the additional margin because of a decline in their stock price, the NBFCs sold the shares in the market to recover their dues, aggravating the slide.

A few promoters nearly lost control of their firms because of their holdings decreasing. And even though the NBFCs dumped the shares at the first sign of trouble, some of them could not recover their entire principal because of the precipitous fall in the share price. After this unpleasant experience, NBFCs tightened their lending norms and would not easily give loans to promoters of mid-cap companies against shares.

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