The Securities and Exchange Board of India (SEBI) has introduced stricter disclosure norms for pledged shares by promoters of listed firms. At the board meeting on Thursday, the market regulator not only expanded the definition of the term encumbrance – basically making it all-encompassing – but also decided to impose more checks and balances on this increasingly prevalent practice.
India Inc promoters had reportedly pledged shares worth Rs 2.50 lakh crore with their respective lenders at the end of December 2018. SEBI’s move comes amid free-falling share prices of several entities including Zee Entertainment, Sun Pharma and the Reliance Group due to post-default distress sale of pledged securities by their lenders.
As per the new norms, promoters will henceforth have to separately disclose detailed reasons for encumbrance whenever their combined encumbrance along with persons acting in concert (PACs) crosses 20 per cent of the total share capital in the company or half their shareholding. SEBI further clarified that the stock exchanges will have to maintain the details of such encumbrances along with the purpose on their websites.
The market regulator also specified that the definition of encumbrance will now include any pledge, lien, negative lien, non-disposal undertaking (NDU) and “any restriction on the free and marketable title to shares”, whether executed directly or indirectly. “Widening the scope of “encumbrance” by including negative lien and NDUs (non-disposal undertaking) etc. is a welcome step by SEBI. This would help in tightening norms for disclosure by promoters and will further improve the transparency,” Pavan Kumar Vijay, founder of Corporate Professionals, a legal and corporate advisory firm, told The Economic Times. Corporates have been known to use many complex forms of encumbrances to escape the disclosure requirements under the previous provisions.
Incidentally, SEBI is not the only regulator taking a close look at share pledging. The RBI’s June Financial Stability Report also put the spotlight on increased promoter activity on this front. “High level of pledging by promoters is seen as a warning signal, indicating the company’s poor health and probably a situation where the company is unable to access funding through other options. Further, the increased pledging activity is risky for any company as debt repayment will leave no room for the company’s growth,” read the FSR.