Sebi plans to tighten rules of pledging shares by promoter group entities

The Securities and Exchange Board of India (Sebi) plans to tighten rules of pledging shares by promoter group entities. The market regulator will soon direct promoters whose pledged shares exceed 20 per cent of the equity capital to cite detailed reasons for this.

Sebi will also make changes to takeover code regulations so that any encumbrance on listed securities is disclosed. It is also likely to make key relaxations to the insider trading framework to ensure that the trading window closure does not clash with corporate activities of listed companies.

The regulator will also pave the way for allowing issuance of dual-class shares in the domestic market but restrict it only to technology companies to begin with. All these decisions are likely at Sebi’s board meeting to be held on Thursday, according to people in the know.

Stricter disclosure for share pledging comes amid growing concerns over exposure of debt mutual funds to promoter pledges through complex structures.

“Sebi is of the view that sole disclosures pertaining to share pledging won’t suffice. Minority shareholders should get to know detailed reasons for pledging of shares by the promoters, particularly in cases where the portion of pledged shares is significant,” said a source.

The move will act as a safeguard for non-promoter shareholders. In an event of a default by promoters, their shares get invoked and sold by the lenders in large quantities. This leads to further fall in prices, affecting all investors.

Currently, there are 750 companies where promoters have pledged their shares. Of this, there are 300 firms where promoters have pledged more than 20 per cent of their shares.

All these companies will have to state detailed reasons for any kind of encumbrance on their shares, including non-disposal undertakings (NDUs). Further, stock exchanges will be asked to maintain details of such companies along with the purpose on their website.

The move will not be applicable prospectively but companies where promoter already exceeds 20 per cent will have to make one-time disclosures. 

Insider trading norms to be relaxed

Sebi plans to relax the rules of trading-window closure. Typically, companies have to impose trading restrictions on insiders — those in possession with price-sensitive information — for a specific time frame.

For instance, after such a window is made applicable for 48 hours after the declaration of financial results every quarter. There is a longer trading window closure of up to six months after certain events. Several companies and legal experts have approached Sebi highlighting practical difficulties in applying the trading window.

Dual-class shares

The market regulator plans to take a measured approach for allowing shares with differential voting rights (DVRs). To begin with, Sebi plans to allow only tech companies to issue shares with superior voting rights (SRs) subject to several restrictions.

Sebi will allow companies having SR shareholders to come out with an initial public offering (IPO) of ordinary shares on the main broad. The SR shares will have a sunset clause of five years from the date of listing.

Also, the maximum voting rights on such shares will be allowed in the ratio of 10 for every one ordinary share. 

Issuance of dual-class shares are fairly common in developed markets, with Facebook, Alibaba, and Snapchat each having issued such shares. In the domestic markets five companies had issued DVRs. However, since 2009 Sebi had directed stock exchanges to prohibit DVR issuance.

New regulations for promoters 

• Sebi wants listed firms to disclose any form of encumbrance on shares
• Companies where promoter pledging exceeds 20% of total equity to face stricter norms
• Promoters will have to state detailed reasons for pledging shares
• Move aimed at safeguarding minority shareholders
• Move comes amid growing concerns over MF exposure to promoter pledging
• Sebi to allow tech companies to issue shares with superior rights 
• Issue of superior rights to come with several restrictions 
• Regulator to drop most proposals made in DVR discussion paper following negative feedback