Saturday, January 31, 2009

SEBI notifies amendments for disclosure of pledged shares of Promoters

SEBI has notified here the amendments requiring disclosure of pledged shares of Promoters and persons forming part of the Promoter Group (referred collectively as “Promoters” here). This issue has been the hot topic on and off this Blog and hence much background is not required for this except a few brief following sentences.

The Satyam episode brought to the forefront the concern that Promoters’ may have pledged a substantial quantity of their shares and thus shareholders and others who rely on the holding of the Promoters may be misled of the real Promoters’ stake. There were also concerns of Insider Trading. Whatever the background, SEBI has now finally notified the amendments.

I will post more thoughts in a later post but the following are the highlights of the amendments:-

1.      The requirements have been made through an amendment of the SEBI Takeover Regulations. I had expected that they would also amend the Insider Trading Regulations and the Listing Agreement. I am not ruling this out wholly but, looking at the wording of the amendment, it is likely that this may be the only provision covering this issue.

2.      The amendment is by introducing a new Regulation 8A to the Takeover Regulations.

3.      As expected, though highly debated, the disclosure is required only of the pledged shares of the listed company and not of shares pledged of the holding or investment Company. Though, see also the concern expressed later.

4.      The Promoters have to make disclosure of pledged shares to the Company within 7 working days of the amendment.

a.      What is the date of amendment whether 28th January 2009 being the date of notification or a later date is an area of ambiguity and SEBI should clarify on this specifically, more so when it makes such flash amendments having almost immediate effect. But more on this in a later post.

5.      The Company in turn should inform the stock exchanges within 7 working days of receipt of this information.

a.      There is a cutoff quantity for this discussed later.

6.      The Promoters will continue to inform the Company of further pledges from time to time and the Company will in turn inform the stock exchanges from time to time.

7.      The Promoters have also to inform the Company when the pledge is invoked.

8.      The Promoters have to make disclosures to the Company of all pledges. However, the Company will inform the stock exchanges only if, during a quarter (March, etc.), the cumulative quantity pledged is 25000 or 1% of capital (peculiarly defined), whichever is less.

Some areas of concern that I can immediately highlight are:-

1.      What details are to be given in the disclosures? There is no further clarification on this, nor is any form specified.

2.      What about disclosure of shares removed from pledge from time to time? There is no requirement but obviously there is nothing to stop Promoters from giving such disclosures.

3.      What is pledge of shares? Though this is a common term in law, it is not defined for the purposes of these Regulations. In the context of shares, a definition would have helped.

4.      Does the Company have to inform on a quarterly basis or every time information is received? The words used are just slightly ambiguous.

5.      Is the minimum quantity (25000 or 1%) per person or for the Promoters/Promoters Group taken as a whole?

-       Jayant Thakur


Renu Gupta said...

I would like to add a few points to your post and raise some questions.

1. Is it possible to have a form for the disclosure of pledge similar to Form 8 (creation of charge over assets of company)?

2. Is there any need to have a disclosure requirement for release of pledge? I believe the idea is to keep the investors updated about anything prejudicial to their interest and a release of pledged shares of the promoters should not prejudice them. What are your thoughts?

3. I think you are right the language for the time period during which company has to make disclosures is ambiguous. Both 7 days within receipt of info and the quarter ending cannot apply together.

4. I think the trigger of 1% or 25,000 would be in two cases:

a) if Mr. A (promoter) alone holds more than 1% or 25,000 shares.

b) if Mr. A along with Mr. B and Mr. C (Promoter Group) together hold 1% or 25,000 shares.

5. How would you define "invocation of pledge" for the purposes of disclosure by the promoter. Would it mean the date on which the pledgee writes to the pledgor to repay the debt or he would invoke the pledge? would it be the date when the pledgee initates court proceedings for invoking the pledge?

Anonymous said...

Hi Jayant,

1. As expected, there is a delay in issuing the amendment.

2. It has no retrospective applicability. So those promoters who were having their pledged shares prior to Jan 28, 2009, but have got them released will escape. Thus, will escape the questions from public.

Further instead of so much complication SEBI should have merely amended clause 35 of the listing agreement, to state that any shares (irrepective of the quantum) should be disclosed as a footnote to the shareholding pattern.

Kind regards,
Yogesh Chande

Jayant Thakur, CA said...

Hi Renu,

Presently, the amendment does not provide the manner of disclosure. But I wonder whether SEBI will prescribe a form soon. Let's see!

On release of pledge, I thought that just as pledge of shares by Promoters is seen to be (rightly or wrongly) a sensitive information, should not their release be also equally sensitive information. For example, would not a Promoter delay the release of information of release of pledge which may see a rise in price (just as information about pledged shares is resulting in a fall)?


- Jayant

Jayant Thakur, CA said...

Hi Yogesh,

I agree with all your points. Particularly your point that the regular disclosures pursuant to the Listing Agreement is the best place to give such disclosure, to which an adhoc disclosure requirement for significant pledges or releases inbetween be added.


- Jayant