Sebi wants full promoter disclosures on pledging

The Securities and Exchange Board of India (Sebi), the capital markets regulator, on Wednesday made it mandatory for publicly traded companies to disclose any pledges of shares by their promoters, responding to mounting concerns over the risk of investing in such entities.
“Promoters who pledge shares have to disclose it to the company and the company, in turn, has to disclose it to the stock exchanges. If we get complaints that people are not complying with the regulation, we will investigate those complaints,” Sebi chairman C.B. Bhave said.
Promoters of listed firms routinely pledge their equity holdings discreetly to lenders, largely to raise personal loans, a practice that has heightened investment risk on Indian stocks and caused large investors to call for mandatory disclosures of such moves.
Such share pledges diluting the equity of founders could also lead to potential takeover situations.
Satyam Computer Services Ltd founder B. Ramalinga Raju, who confessed on 7 January to having committed accounting fraud to the tune of Rs7,136 crore, was found to have pledged almost all of his equity stake with private lenders to raise cash.
On Monday, Mint had reported that nearly $15 billion (Rs73,650 crore today) worth of promoter shares have been pledged as collateral with lenders, according to a dozen senior executives from the broking, banking and non-banking finance communities. These executives also said that such transactions had also been struck offshore with large global banks, and facilitated by private bankers, while in some cases funds were moved using an illegal money transfer system known as hawala.
The announcement by Sebi on Wednesday, made by chairman C.B. Bhave, aims to curb such practices. Under its new rules, companies are required to make both so-called event-based and periodic disclosures of pledging of shares by promoters.
Event-based announcements will be made as and when a promoter’s shares are offered as loan collateral, while periodic disclosures will require firms to report all such pledges at the end of every quarter.
Bhave did not make clear how these new rules would be implemented, only saying that the regulator would seek details of such activities as on 31 December 2008. He also did not specify a starting date for periodic declarations.
“We have decided to give them (promoters) time,” Bhave said.
Housing Development and Finance Corp. Ltd (HDFC) chairman Deepak Parekh, who has been appointed by the government to the Satyam board, said at an industry conference here on Wednesday that the move to tighten disclosure rules was a “good step forward”.
“It’s positive because in India just because you don’t want to reduce your family holding, you keep borrowing against your equity and keep growing because you don’t want to give up control on the company,” Parekh said.
Experts said promoters could skirt the regulations by exploiting loopholes.
An investment banker at a foreign brokerage noted that share pledges could take place at a holding company level. Holding companies are not required to make such disclosures. “Promoters will now take the transaction one level up,” this banker said.
At least three companies have adopted this structure, replacing the pledged shares of their publicly traded company with the shares they own in a holding company, the banker said, warning that many more could take this route.
Bhave, however, maintained that pledging shares in a holding company may not have the same impact (as pledging shares of publicly traded companies). “Let us first implement this and see what happens,” he said.
Also, in the near term at least, companies that make such disclosures will likely see a slide in their stock price, said analysts and fund managers.
“This will be considered as additional leverage on the company,” said Adrian Mowat, managing director and chief Asian and emerging market equity strategist at JPMorgan Securities (Asia Pacific) Ltd.
“An increasingly obvious risk (in India) is that entrepreneur-dominated companies are vulnerable because of heavy personal borrowing by these entrepreneurs against their own share prices,” wrote Christopher Wood of CLSA Asia-Pacific Markets in a 15 January Greed and Fear report.
The regulator also discussed the issue of peer review by independent auditors for large listed companies, but is undecided on the criteria for it. Bhave also declined to clarify whether the company or the regulator would pay for the additional audit.
The Sebi board also reviewed the progress made so far in the investigations into Satyam Computer.
“We cannot ascertain the size of the scam until investigations are over. We are investigating the books of Satyam to determine the bank deposits of the company. We have not been able to question Mr Raju, but we have gone to the auditors, internal finance department of the firm and questioned them,” Bhave said.
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