Sebi plugs loopholes in share-pledging disclosures

Companies were using innovative methods to circumvent disclosure requirement: Sinha

Market regulator Securities and Exchange Board of India (Sebi) has tweaked the share-pledging disclosure format to ensure all types of encumbrances on shares are disclosed by companies.

A number of companies were using non-disposal undertaking (NDU) and other innovative methods to circumvent the mandatory disclosure requirement. Under Sebi’s takeover regulations, promoter- shareholding, which has been pledged, should be reported with the stock exchanges.

UK Sinha, chairman, Sebi, said, “We found that using very innovative methods, advised by very powerful legal firms, companies came out with a method called NDU and various other methods of creating encumbrance.  We have not created a guideline, stating any sort of encumbrance has to be reported.”

Typically, an NDU is an agreement where shares are transferred into a new demat account for the purpose of pledging. The beneficial ownership on the shares, however, doesn’t change and also the new entity (transferee) can’t dispose off the shares.

Market experts said some companies were forming special purpose vehicles (SPVs) to transfer a part of their shareholding before pledging to avoid making disclosures.

Sinha said Sebi was not asking for additional disclosures from companies but only “trying to pull loopholes which were rampant”.

Last month, Sebi had issued a circular directing companies to make disclosures about the nature of encumbrance — pledged, lien or NDU. The regulator had also asked companies to disclose not just promoter-encumbered shares but also of persons acting in concert (PAC).

Speaking on the sidelines of Artha, a capital market conference organised by the Indian School of Business’ (ISB’s), Sinha reiterated that equities market is insulated from the Rs 5,600 crore settlement crisis at the Financial Technologies -promoted National Spot Exchange Limited (NSEL).

“I would like to clarify, the promoters of this company (NSEL) are also promoters of a stock exchange that Sebi regulates. I would like to assure you that we are very conscious that the entity we regulate is thoroughly ring fenced,” he said.

Sinha said Sebi had taken steps to ensure good governance and settlement process were in place at the Multi Commodities Exchange Limited  (MCX-SX).

“Since we are worried about risk management we have  verified the collaterals and other securities required for settlement,” said the Sebi chief.

Sinha also said the move to allow higher commissions to mutual fund houses for penetration beyond the top 15 cities has shown encouraging results.

“Already inflows from beyond 15 cities have gone up after we have provided incentives...This has been in place since May last year and already the inflows from top 15 cities have been doubled,” Sinha said.

Last year, Sebi had allowed additional expense ratio of up to 30 basis points for new inflows from beyond the top 15 cities.