Seven days to disclose pledged shares

No limit for periodic disclosures to be filed with quarterly results.

The promoters of all listed companies will have to make full disclosure of pledged shares within seven working days. This will also apply to offshore transactions.

Since the guidelines are with retrospective effect, the disclosures to stock exchanges will start next week.

According to a notification issued today by the Securities & Exchange Board of India, the disclosure diktat will apply to all cases where promoters have pledged over 25,000 shares or more than 1 per cent of the equity of their companies.

However, for periodic disclosures, which will have to be filed with quarterly results, there will be no limit. The disclosure will clearly have to say how many shares are encumbered. Sebi had mandated two kinds of disclosures last week — event-based disclosures, which must be made as and when the shares are pledged, and periodic disclosures, which must be made when companies report their quarterly statements to stock exchanges.

The market regulator amended the Sebi (Substantial Acquisition of Shares and Takeover) Regulations 1997 to include the recent guidelines regarding the pledging of shares. The new regulations, now part of the Gazette, will be called Sebi (Substantial Acquisition of Shares and Takeover) Amended Regulations 2009.

The only relief for promoters is that they do not need to disclose whether they have pledged shares of the holding company of a listed entity.

Sebi’s decision, announced last week, came after the regulator’s primary market advisory committee recommended that promoters must make disclosures when they raise finances by pledging their shares.

The recommendation was made because lenders ask promoters to pay additional margins when the value of the shares pledged as collateral falls. Lenders sell these shares in the market if promoters fail to pay margins — a common trend in a rapidly falling market. This could have a cascading impact on the stock price, the committee observed.

The promoters of at least 200 companies are understood to have raised funds by pledging their shares, the most prominent being former Satyam Chairman Ramalinga Raju, who pledged his entire stake to lenders in December. The lenders dumped the shares in the market when Raju failed to pay margins.

“A lender is not automatically an insider. But if he has some inside information and has traded on that basis, he will be liable under the insider trading guidelines,” Sebi Chairman C B Bhave had clarified earlier.

Nirmal Jain, India Infoline chairman, said this was a good move as there were many small- and mid-cap companies whose promoters had pledged shares for their unknown financial requirement. But if the quantity of shares pledged is large, it can have implications leading to a run on the share prices of that company. “That will start a vicious cycle,” Jain said.