HYDERABAD: When promoters of family-owned firms often pledge their shares to raise capital, it often exposes the firm to a fall in value and high risk of crash along with low investment in innovation. This has been disclosed by one Indian School of Business (ISB) study.
The study, which evaluated data from 1,492 firms listed National Stock Exchange of India From 2009 to 2019, it was found that the degree of mortgage and related governance outcomes are comparatively low for non-family firms.
Pledging is usually associated with a fall in the firm’s value for two reasons – a higher accident risk and an increase in promoter risk-averse after the pledge.
The study is authored by Nupur Pawan Bang, Saugata Ray, Nandil Bhatia and Kavil Ramachandran of the Thomas Schmidhini Center for Family Enterprise at ISB.
Anil Ambani cited as an example
It cited the example of Zee Entertainment’s Subhash Chandra and K Anil Ambani. Reliance ADA Group, who lost control of their firms due to wrong business decisions and excessive mortgages.
“Based on our sample data, we document a negative relationship between promoter mortgages and the firm’s R&D and investment intensity among family firms, compared to nuclear family business group firms (FBGFs). A little more emphasis is placed on the harmful effects of mortgages. Firms (SFF),” adding that the firms whose promoters have pledged shares face less growth in their net worth.
It said that the long-term competitive advantage of the firm could be eroded by pledging due to possible low investment in assets and R&D.
According to the study, most companies with pledged shares are at risk of losing their promoters’ ability to control the firm.
The study, which evaluated data from 1,492 firms listed National Stock Exchange of India From 2009 to 2019, it was found that the degree of mortgage and related governance outcomes are comparatively low for non-family firms.
Pledging is usually associated with a fall in the firm’s value for two reasons – a higher accident risk and an increase in promoter risk-averse after the pledge.
The study is authored by Nupur Pawan Bang, Saugata Ray, Nandil Bhatia and Kavil Ramachandran of the Thomas Schmidhini Center for Family Enterprise at ISB.
Anil Ambani cited as an example
It cited the example of Zee Entertainment’s Subhash Chandra and K Anil Ambani. Reliance ADA Group, who lost control of their firms due to wrong business decisions and excessive mortgages.
“Based on our sample data, we document a negative relationship between promoter mortgages and the firm’s R&D and investment intensity among family firms, compared to nuclear family business group firms (FBGFs). A little more emphasis is placed on the harmful effects of mortgages. Firms (SFF),” adding that the firms whose promoters have pledged shares face less growth in their net worth.
It said that the long-term competitive advantage of the firm could be eroded by pledging due to possible low investment in assets and R&D.
According to the study, most companies with pledged shares are at risk of losing their promoters’ ability to control the firm.
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