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This series of articles introducing securities laws for
listed companies to the lay reader continues . . .
(1) SEBI has recently made disclosure of shares pledged by
Promoters compulsory. The requirements have come into effect from 28th January
2009 but the disclosures are to be made in stages/events and actually in more
than one way. As it is a new and continuing requirement it is important to
discuss the same. I expect these requirements to continuously evolve in the near
future. The impact on the market value of some scripts where promoters have
pledged a part of their holding has been negative.
(2) While SEBI has not stated the reason for introducing this
amendment, it perhaps does not need to, considering the heated discussion in the
press on the Satyam episode where the Promoters had pledged their shares which
in turn were sold by pledgees on invocation of the pledge and/or failure of the
promoter to provide additional margin. Most of such sales were made long before
the disclosure of the alleged scam when the prices were still high. The common
investor in India normally considers the stake of the Promoters in a company as
an important factor. The investors were outraged not only because the Promoters
had effectively encashed their holdings, but also by the consequent crash in the
price of shares.
(3) SEBI has acted in haste to prevent more Satyams, by
introducing disclosure requirements. It is a fact that this new requirement is
definitely useful and some rightfully argue that it was long overdue.
(4) Let us now examine the actual wording of the requirement.
I repeat that while earlier there was no requirement to disclose pledge of
shares by promoters, now the requirements are multiple overlapping and even at
times inconsistent. Let us first summarise the regulatory provisions :
(a) A new Regulation 8A has been inserted in the SEBI
Takeover Regulations. This regulation requires promoters to disclose to the
Company the details of shares pledged by them and the Company is required in
turn to intimate the same to the stock exchanges.
(b) Clause 35 of the Listing Agreement that requires
disclosure of shareholding pattern to be
intimated to the stock exchange has been amended
to include disclosure of shares held by Promoters that are pledged or
otherwise encumbered.
(c) Similarly, Clause 41 which requires publishing of
periodical results has been amended to also include the details of shares
pledged/encumbered by Promoters.
(5) These amendments though are stated to be with immediate
effect, have effectively differing applicability dates in terms of individual
requirements. However, before we go into these individual requirements, let us
consider some terms :
(a) Disclosure is to be made by Promoters and persons
belonging to the Promoter Group. For this purpose, it has been stated that
the definition under Clause 40A of the Listing Agreement is to be followed.
This clause, in turn, refers to the definition of these terms under the SEBI
DIP Guidelines, but modifies that definition a little. For this article, the
collective term ‘Promoters’ is used to cover all of them.
(b) Disclosure is required of shares pledged. These
refer to shares of the listed company and not shares of any investment or
holding company through which the Promoters may hold shares. This is seen
as a loophole that results in an incomplete picture of the effective
encumbrance of Promoters’ holding. Having said that, it is also true that in
many cases, lenders typically prefer pledge of shares of the listed company
itself as they can be easily sold and monies realised, instead of shares of
the holding company for which the process may be longer. Thus, the loophole in
reality, to a large extent is non-existent.
(c) Disclosure is to be of shares that are pledged
or otherwise encumbered. There is an inconsistency in the scheme of the
different provisions whereby for one set of provisions, the disclosure is to
be made of shares ‘pledged’ and for others, disclosure is also required of
shares ‘otherwise encumbered’ or just ‘encumbered’. These terms being common
legal terms are relatively easily understood, but if one goes into a detailed
analysis, which space constraints do not permit, there are indeed
complexities. For example, shares can be in paper form and dematerialised form
and the pledge of either of them can be in different manner. Also, shares can
be ‘encumbered’ in many ways and indeed there can be many ways in which
restrictions can be placed on the shares that may amount to encumbrance.
(6) Disclosure under the takeover regulations :
(a) A new Regulation 8A has been inserted to require
disclosure of ‘shares pledged’.
(b) There is a transitional requirement to cover pledges
existing on the date when the amendment came into effect. There is some
controversy as to when can the amendment be said to have come into effect, but
the conservative view is that the regulation has come into effect from 28th
January 2009. This date is important for the initial period of disclosure. It
is unfortunate that SEBI has not been more specific about the effective date.
(c) The Promoters have to intimate the details of the
pledged shares, in the prescribed format, to the listed Company within 7
working days of the amendment. The Company, in turn, has to inform the stock
exchanges where the shares of the Company are listed, within 7 working days of
receipt of information from promoters. However, this is to be done only if
during a calendar quarter, the cumulative quantity of shares pledged is at
least 25000 or 1% of the total shareholding/voting rights.
(d) For further pledges, the Promoters have to inform
within 7 working days of creation or invocation of pledge. The Company, in the
manner similar to the above, informs the stock exchanges of such further
pledges or invocation of the pledge.
7) Disclosure under amended Clauses 35/41 of the Listing Agreement:
a) These amended Clauses require disclosures of Promoters’ shares that are pledged or otherwise encumbered. Suitable formats have been provided for this.
b) The disclosures will be on a quarterly basis starting from the quarter ending March 2009.
c) Regulation 8A of the Takeover Regulations requires disclosure of pledged shares only by the Promoters of the company. How will the company then know what shares are ‘encumbered’ ? This may sound to be a lacuna, but perhaps a better view is upholding the spirit and that the Promoters should still inform of shares that are ‘encumbered’ also. The Promoters are in control of the company. The requirement is on the company to disclose the shares encumbered by the Promoters. The Promoters cannot claim that, on the one hand they are in control of the company and, on the other hand the company is a separate entity that should be treated as an entity independent for this purpose. Of course, SEBI could clarify the requirements to avoid confusion.
8) In conclusion, recollect the oft-quoted comment of Warren Buffet that:
“You only find out who is swimming naked when the tide goes out”.
When Promoters pledge a substantial portion of their shares, they expose themselves and the company they control (and thereby the shareholders) to serious risks especially when there is a downturn.
The disclosures pursuant to these amendments will :
There is considerable discussion in the media that SEBI should mandate disclosure of end use of funds raised by pledge of shares. This information, in the opinion of the author, could be very relevant and indica te the risks being taken by the promoters which could impact the operations of the company whose shares have been ‘pledged’ or ‘encumbered’.
