Sebi's share pledge disclosure norms to impact 300 listed companies

Topics pledged shares

India's market regulator has tightened the rules on companies pledging their shares.
Capital market regulator Securities and Exchange Board of India’s (Sebi’s) latest directive to India Inc on share pledge disclosures will impact as much as 300 companies.

An analysis of share pledging data for the quarter ended March 2019, shows there are 300 listed companies where the quantum of shares pledged by promoters exceeds 50 per cent of their promoter shareholding and 20 per cent of total shareholding.

“Promoters shall be required to disclose separately detailed reasons for encumbrance whenever the combined encumbrance by the promoters and persons acting in concert (PACs) crosses 20 per cent of the total share capital in the company or 50 per cent of their shareholding in the company. The stock exchanges will maintain the details of such encumbrance along with purpose of encumbrance, on their websites,” Sebi said in a release on Thursday.

Interestingly, there are 60 companies where promoters have pledged more than 99 per cent of their shareholding. In total, there are 750 listed companies where at least some shares have been pledged.

Industry players said the list might expand as Sebi has expanded the definition of pledging to capture any form of encumbrance on shares.

The regulator has said “any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly” will be termed as encumbrance.

The move follows concerns that concerns that certain arrangements between promoters and issuers such as negative lien and non-disposal undertaking were not getting covered under the current definition.

The rationale behind Sebi’s move asking promoters to give detailed disclosures is to increase transparency and safeguard minority shareholders.

Experts say minority shareholders are always on tenterhooks in case of companies where promoter pledging is high.

“As witnessed in recent cases, if a promoter defaults or is not able to provide additional cover, lenders invoke their shares which leads to a sharp fall in the stock prices, affecting all investors. Providing reasons for pledging will help investors take informed decisions on whether they should remain invested in companies where pledging is high,” said an analyst.

Some say believe the additional disclosures, if not done right, could do more bad than good.

“Such disclosure may create more confusion in the mind of an uninformed investor, who will not be able to judge the difference in risk between, say, a pledge, which entails the risk of promoter losing such shares and a non-disposal undertaking, where there is no such risk,” said Vishal Yaduvanshi, Partner, L&L Partners.

At the end of March 2019 quarter, outstanding promoters pledged shares stood at Rs 1.95 trillion, about 1.3 per cent of the India’s total market capitalisation.

In recent months, the market has turned wary of companies with high promoter pledging, with shares of several companies tumbling.

The Financial Stability Report released by the Reserve Bank of India too underscored risks around high promoter pledging.

“High level of pledging by promoters is seen as a warning signal, indicating the company’s poor health and probably a situation where the company is unable to access funding through other options. Further, the increased pledging activity is risky for any company as debt repayment will leave no room for the company’s growth,” the report said.

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