What is a promoter pledge?

When an owner or promoter of a company takes a loan against his own shares as collateral, it is called promoter pledging. A promoter may pledge his shares for personal financial needs or to fund new investments. While pledging of shares is a common practice, the problem arises when the stock price falls and the bank asks the promoter to pledge more shares or repay a certain portion of the loan. If the promoter is unable to cover the shortfall, the bank may sell the shares, leading to a further fall in the stock price. This may trigger selling from other investors as well, which can turn into a vicious cycle, especially if the company is fundamentally weak.


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