Illustration: Ajay Mohanty
Promoters’ pledge of their shareholding
to raise funds is set to come under closer regulatory scrutiny, and a review of guidelines in this matter is in the offing owing to risks arising from excessive leverage and the linkages between financial intermediaries.
The Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi), Insurance Regulatory and Development Authority of India, and Pension Fund Regulatory and Development Authority are expected to work closely to review the regulatory framework of the subject.
Among the areas the regulators can be expected to look at are the end use of funds after the pledge, the extent of leverage by companies, and the exposure of mutual funds (MFs) that are part of financial conglomerates to such transactions.
While promoters ostensibly opt for the pledged-share route to fund new businesses, there have been cases where the money has been routed back to the company by complex structures to raise promoters’ stake, or used to manipulate stock prices, said a source.
Promoters who have siphoned off money may have no hesitation about losing control of a company, throwing in lenders at the deep end.
As the stock prices of companies that have a high level of promoter share-pledge tend to fall fast when compared to the wider market, this compromises the interests of minority shareholders too.
Other key aspects to be examined are if there is adequate cover of shares (both pledged and free) over the debt raised by promoters through various holding and investment companies, and that this not be limited to and be seen from the standpoint of a specific transaction.
In a majority of cases, it was less than two times’ the cover stipulated by the central bank for loans against shares by both banks and non-banking financial companies (NBFCs).
While Sebi recently asked MFs to ensure that the collateral is four times the investment, the regulators may look at this afresh, given that promoters raise money through various vehicles.
In the case of financial conglomerates, the issue of share pledges becomes important because a holding company (holdco) structure is in the works and because of the resultant need to look at cumulative exposures.
Share pledges by the promoters of private banks will also be under scrutiny. This is because banks are deposit-taking entities and part of the settlement system, and a sharp fall in their stock price due to a “default trigger” on the promoters’ pledge has much wider ramifications.
It is surmised that the emerging regulatory topography may take inspiration from leading global proxy advisory firm Institutional Shareholder Services’ view that “pledging of company stock in any amount as collateral for a loan is not a responsible use of equity”.
Promoters’ use of complex share pledge structures to raise stake or rig stock price to be checked
A new yardstick may be used to look at the cover available (of both pledged and free shares) over the total debt raised by promoters through various routes
Excessive leverage through holding company structures and the pledging of shares by promoters to be looked into
Such pledges by promoters of private banks will also be under scrutiny