Tuesday, January 20, 2009

ET Bureau: Promoters will have to disclose pledging of shares

The Securities and Exchange Board of India (Sebi) is set to make it mandatory for promoters to report to stock exchanges, if they pledge their shares to raise funds.

At the primary market advisory committee meeting held on Monday, there was a consensus that irrespective of the quantity of the shares pledged, the promoter group has to disclose the details to shareholders and stock exchanges.

"When the promoter has exhausted all other sources to raise funds, he pledges his holding in the company as a last resort, which is a clear indication that it is not an ideal situation.

Sebi is likely to come out with new disclosure norms shortly, in a bid to protect the interest of existing and potential shareholders, as pledging of shares could result in a change of ownership if the promoter is unable to redeem those shares by repaying the loan.

This is critical, as many investors consider promoter holding and management structure of the company as a critical aspect of their investment decision.

The capital market regulator’s proposal to make pledged shares information public comes in the wake of the recent instances, where most investors did not know that a portion of the promoters’ stake were pledged till these stocks were dumped by lenders.

Stock prices have been on a downtrend for some time now, due to adverse market conditions. When that happens, lenders ask for either additional shares, or margin payment to cover the shortfall.

In the event of promoters being unable to meet these conditions, lenders dump the shares in the market to recover their dues. As the sale of these pledged shares usually happens in huge quantities, it has a cascading impact on the stock price.

In developed markets, the pledging of shares by promoters, or insiders, as collateral for a loan is equivalent to a sale of the stock to the pledgee.

Some of the recent instances in India, where company promoters had pledged shares to financial institutions include Satyam Computer and Orchid Chemicals. In the case of Satyam, the sharp fall in the stock price, following the company’s abortive bid to buy a stake in Maytas, led to margin calls getting triggered.

Fund managers and investment bankers said a lot of company promoters, especially in the realty sector, have pledged their shares with financial institutions and finance arms of broking outfits.

However, this information is usually not made public, as there are no rules mandating them to do so. The pledging of shares by promoters was not considered a major issue in the bull market, as nobody thought that the market could slide so rapidly. The non-availability of cheaper money in recent months has made the buying back of the pledged shares by promoters difficult.


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