Pledging of Shares by Controlling Shareholders and Implications for Foreign Institutional Investors
By Nupur Bang, Nandil Bhatia, Sougata Ray, Kavil Ramachandran
Business Horizons | February 2024
DOI
doi.org/10.1016/j.bushor.2024.02.009
Citation
Bang, Nupur., Bhatia, Nandil., Ray, Sougata., Ramachandran, Kavil. (2023). Pledging of Shares by Controlling Shareholders and Implications for Foreign Institutional Investors Business Horizons doi.org/10.1016/j.bushor.2024.02.009.
Copyright
Business Horizons, 2023
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Abstract
Offering shares as collateral (share pledging) to avail of business or personal loans has increasingly been used as a financing tool by controlling shareholders in developing economies such as India. With the focus on protecting the rights of minority shareholders, pledging of shares has been subject to scrutiny as academicians, regulators, and corporate governance experts have highlighted the detrimental effects of share pledging on the firm. This study raises awareness about share pledging for uninitiated foreign institutional investors (FIIs) looking to invest in developing economies. The study highlights the conditions, viz. motivation to pledge, degree of ownership, and quantum of pledge, under which share pledging may be concerning and when it may benefit the FIIs. We distinguish between pledging under different conditions and the implications arising under the outlined scenarios for FIIs. Our analysis provides potential investors with a comprehensive overview of pledging and its possible consequences for the firm. The study urges investors to take a more nuanced view of pledging rather than paint all of it with the same negative stroke.

Sougata Ray is a Professor of Strategy and Entrepreneurship (Practice), Thomas Schmidheiny Chair Professor, and Executive Director of the Thomas Schmidheiny Centre for Family Enterprise, at the Indian School of Business (ISB). Earlier, he served at the Indian Institute of Management Calcutta for over two decades as a Professor of Strategic Management, a member of the Board of Governors, and Dean. He was also a senior-level executive at Infosys Technologies Limited for two years in a strategic role as Head of innovation Lab. He is an alumnus of Indian Institute of Management, Ahmedabad and the Indian Institute of Engineering, Science and Technology, Shibpur.

Professor Ray’s research interests have evolved over the years in understanding various facets of strategic management, entrepreneurship, innovation and the governance of firms and business groups in high-growth economies. Given the ubiquity of family firms in India and observing how family owners and leaders play a pivotal role in shaping the future of enterprises, he was gradually drawn into family business research. In recent years, under the aegis of the Thomas Schmidheiny Centre for Family Enterprise, he has been spearheading a mega programme towards developing a solid research-based understanding of family firms and business groups in India and South Asia. He has also been leading a research programme in the areas of social entrepreneurship, corporate sustainability strategy and practices, bottom-of-the-pyramid initiatives, and involvement of corporations in inclusive and sustainable development.

Professor Ray is one of the most prolific and cited home-grown strategy scholars in India. He has been publishing regularly in reputed scholarly journals and presenting in leading peer-reviewed international conferences. He has received over half a million dollars in research grants, several prestigious research and teaching awards, and numerous award nominations.

He blends over three decades of experiences in diverse roles – as an international-quality academic, research, and institution builder, alongside  hands-on corporate managerial and governance roles as an executive, member of the Board of Directors, and co-founder of startups.. He has been an advisor to numerous medium and large corporations, family businesses, and startups, and he has served as Principal Consultant to leading international development agencies. He currently sits on the governing and advisory boards of several listed and unlisted companies, startups, and social enterprises.

Professor Ray has taught in numerous executive education programmes and has designed and conducted many workshops exclusively for owner-managers, entrepreneurs, and C-level executives of companies in India, Asia, Middle East, Nordic and Scandinavian countries. Over the years, he has led over thirty C- level executive delegations to countries on every continent for high-level meetings with the ministers, high-ranking officials, multilateral agencies such as the WTO and ILO, Chambers of Commerce, MNCs, industrial organisations, research labs, and academic institutions.

Sougata Ray
Sougata Ray