Plunging Stocks Could Trigger Wave of Margin Calls for Controlling Shareholders

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A sharp decline in the share prices of a slew of China’s listed concern has led to margin calls on controlling shareholders who have pledged their equity stakes as collateral for credit.

A filing made by Boomsense with the Shenzhen bourse on Tuesday indicates that 17.8% of the company’s stock had been pledged by the controlling shareholder as collateral for loans.

Creditors are now making margin calls due to ongoing declines in the share price of Boomsense, which has lost around half of its value since January, and was suspended from trading on Tuesday.

The margin calls could have triggered further declines in its share price if the borrower had been forced to sell the exorbitant amount of stock he pledged to creditors.

Caixin reports that Boomsense is far from alone, given that pledging stock to obtain credit from brokerages has emerged as one of the most popular financing methods for key shareholders in China’s listed concerns.

Other companies that could come under similar pressure include NanFeng Corp, Jiangsu Dewei Advanced Materials, Jinlong Machinery & Electronics Co., Ltd. and Tianma Bearing Group Co., Ltd.

The practice of pledging stock as collateral has drawn the attention of authorities, who stipulated in January that a maximum of 50% of an A-share company’s outstanding equity could be pledged.

Brokerages themselves have become increasingly averse to providing loans collateralised with shares due to risk concerns, leading them to charge higher interest rates as well as provide smaller amounts of financing relative to the market value of pledged stock.

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