SEBI Likely to Tighten Rules Concerning Pledged Shares

The Securities and Exchange Board of India (SEBI) is all set to tighten norms concerning pledged shares and other forms of encumbrances in its upcoming meeting on June 27, it has been reported.

Sources told Mint that the SEBI board is considering to widen the definition of encumbrance and heighten disclosures on encumbered shares. As per the current regulations, encumbrance definition is limited to a pledge of shares, lien or any such transaction. “The new definition will be widened to include any restrictions on free and marketable shares of the promoter, which affects the tradability of the shares. It will also include negative lien and non-disposable undertakings,” the source was quoted. The move is to “cover all innovative structures and methods used by promoters.”

This comes in the wake of several complaints received by the SEBI fixed maturity plan (FMP) investors. Subsequently, SEBI has recently sent a couple of show cause notices to Kotak Mutual Fund and HDFC Mutual Fund asking explanations regarding a standstill agreement the fund houses made with the promoters of Essel Group, as it affected the payout of the FMP investors.

Widening the scope of definition is a welcome move, says Sandeep Parekh, additional independent director of HDFC Bank. Talking about this issue, Parekh told Economic Times: “The definition of encumbrance being widened further is welcome because before the new takeover code came, just pledging of securities and the people who were doing all kinds of contracts and things like non-disposal agreement etc was there. They widened it to encompass any kind of encumbrance and if you look at history, encumbrance they have said will be any means possible. They have kept it quite wide.”

As per estimates, mutual funds have an exposure of over Rs 51,000 crore to such loans against shares schemes.

The board may likely mandate the promoters to disclose details of an encumbrance within seven days if 20% of their share capital is leveraged.

“More often than not, in case of encumbered shares, the economic risks of share price fluctuation are passed on to the lender, whereas the political right or the voting right remains with the promoters. This is not to say share encumbrances are bad, as many times these are created for company expansion, meeting financial needs of the company. The problem arises when investors do not know the reason for encumbrances. The new amendments are meant to bridge this gap,” said another source to Mint.

According to BSE data, more than Rs 2 lakh crore worth shares are pledged by promoters of more than 800 companies, as of 24 June.

Earlier this year, two giant corporate houses – Essel Group and Anil Dhirubhai Ambani Group – made standstill agreements with their lenders who gave consent not to sell off shares till September this year. Both the groups claimed that the agreements cover more than 90% of the loans pledged against their shares.

Also Read: Essel Group’s Standstill Agreement Back in Spotlight