Firms may have to tell reason of share pledge

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Market regulator Sebi may soon ask company promoters to disclose the purpose when they pledge shares. The Securities and Exchange Board of India had last year made it mandatory for firms to report all encumbrances under share pledges. Now it may even want to know the reason of such pledges and the end use of the money.

At the end of the December quarter, the total value of the pledged shares stood at $23 billion, up 15 per cent quarter-on-quarter (QoQ). In rupee terms, that value was Rs 1.44 lakh crore, up 14 per cent QoQ, according to a research note by Morgan Stanley.

Assuming a 50 per cent margin, the total bank credit to these promoters would be $11 billion, which is 1.18 per cent of the total outstanding bank credit. “Promoters pledge shares for various reasons, most of which have nothing to do with company interests,” said an office bearer at an investor forum.

“If they are asked to give reasons for share pledging, it would make the entire process more transparent,” he said. Sebi officials did not comment. An email sent to the Sebi spokesman remained unanswered.

An official at a Mumbai-based investor forum, however, said such detailed filings might make the disclosure format very complicated and not serve any purpose.

Sebi made disclosure of share pledges mandatory after the Satyam scam, which broke out when several financiers sold the shares pledged by founder Ramalinga Raju after a sharp fall in the stock. Financiers normally lend 50 per cent of the value in share pledges, and they either ask for additional shares or sell the pledged shares if the stock falls more than 50 per cent.

“We feel Sebi must ask promoters to disclose the reasons for share pledges so that investors know for what purpose they have pledged their stake,” said the first investor-activist quoted above. According to Morgan Stanley, consumer staples and energy firms reported the biggest drop in share pledges in the December quarter, but there was an increase in the case of consumer discretionary and utilities firms.

At the end of the quarter, consumer discretionary, followed by the energy sector had the most widespread as well as biggest share pledges in value terms. As a percentage of market capitalisation, total share pledges were highest for the energy and utilities firms while as a percentage of promoter holding, it was highest for energy and lowest for technology companies.

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