The Securities and Exchange Board of India (Sebi) tightened the norms for pledging of shares on Wednesday by promoters of listed companies.
In its circular, Sebi directed every listed firm to disclose detailed reasons for pledging of shares by its promoters along with the amount of stake pledged within two days if the total amount of shares pledged by the promoter or the promoter group crosses 50% of the total stake held by the promoter or if it is more than 20% of the concerned company’s total share capital.
At present, a listed firm needs to disclose about share pledges by its promoters within seven days of such an action.
Incidentally, the development comes just two days after late V.G. Siddhartha promoted Coffee Day Enterprises Ltd. disclosed on 6 August that between 4 July and 29 July (when Siddhartha went missing), Siddhartha had pledged a large amount of his holdings with multiple entities to provide security for loans taken by a number of CDEL group firms.
Siddhartha is the founder of homegrown coffee shop brand Café Coffee Day.
A 6 August CDEL filing on exchanges revealed that between 4 July and 29 July, Siddhartha’s pledged stake rose from 23.38% to 27.68%. Siddhartha held 32.75% stake in CDEL, whose incessant fall in stock price on exchanges after Siddhartha’s tragic death has eroded shareholders’ wealth significantly since 30 July. CDEL stock plummeted from ₹192.55 to ₹81.25 between 29 July and 7 August on BSE Ltd.
Sebi, in 2011, introduced the requirement to disclose pledge and other encumbrances on shares after the Satyam scandal where the promoter Ramalinga Raju’s shares were pledged to financial institutions that were not known to Satyam’s then shareholders. After Raju’s share pledge came into light the company’s shares plunged heavily, adversely impacting the shareholders.
Sebi, on Wednesday, said that in order to bring greater transparency regarding reasons for encumbrance, particularly when significant shareholding by promoter along with persons acting in him (PACs) is encumbered, it has been decided to prescribe additional disclosure norms on share pledging.
“The promoter of every listed company shall specifically disclose detailed reasons for encumbrance if the combined encumbrance by the promoter along with PACs with him equals or exceeds 50% of their shareholding in the company or 20% of the total share capital of the company, within two working days from the creation of such encumbrance,” stated the Sebi circular.
The market watchdog said that such disclosures will be warranted on every occasion, when the extent of encumbrance (having already breached the above threshold limits) increases further from the prevailing levels.
At present, listed firms are required to disclose the amount of share pledge by promoters and its change along with short basic reasons for such pledging.
Sebi said that if the existing combined encumbrance by the promoter along with PACs with him is either 50% or more of their shareholding in the company or 20% or more of the total share capital of the company as on 30 September, 2019, he has to specifically make first disclosure on detailed reasons by 4 October, 2019.
To be sure, recently on 27 June, following a board meeting, Sebi tightened share pledging norms and said that any direct, indirect lien on shares will also qualify as encumbered shares and promoters of the company will have to furnish reasons if combined encumbrance crosses 20% of the company’s equity capital.
This move was essentially fallout of the recent crisis faced by mutual funds that had exposure to loan against share schemes. Several debt mutual funds have been investing in papers of less-known companies backed by promoter shares.
It may be recalled that in 2012, the promoters of Vijay Mallya-promoted United Spirits Ltd did not disclose the creation, invocation or release of certain pledges in respect of USL shares in a timely manner, i.e. within seven days of share pledging.
While passing an order against USL, the concerned Sebi member had said that the main objective of the takeover regulations is to achieve fair treatment by mandating disclosure of timely and adequate information to enable shareholders to make an informed decision and ensuring that there is a fair and informed market in the shares of companies affected by such change in control. Correct and timely disclosures are also an essential part of the proper functioning of the securities market and failure to do so results in preventing investors form taking well informed decision.
“The provisions of this circular shall come into effect from 1 October 2019”, the Securities and Exchange Board of India (Sebi) said.