Thursday, February 5, 2009

Disclosure of Pledge of shares of Promoters - some more thoughts

SEBI had notified amendments requiring disclosure of pledged/encumbered shares of Promoters that were discussed preliminarily here where the links of the notifications were also given. A reading of these notifications, issued differently over a few days, but read together, reveals some points worth highlighting here.

1.      It may be recollected that now there are three independent set of provisions governing disclosure of pledged shares the new Regulation 8A of the SEBI Takeover Regulations, Clause 35 and Clause 41 of the Listing Agreement though there is some common base amongst them too. As we will see later, they are inconsistent too since they could possibly reveal differing quantity of shares under charge under different documents filed/published.

2.      A reading of the requirements reveal that while Regulation 8A seeks disclosure of “pledged” shares, Clauses 35/41 seeks disclosure also of shares “otherwise encumbered” or “encumbered”. The term “encumbered” is not defined here but obviously it results in the scope being broader and I believe it would cover hypothecation.

3.      How and when will the Company know about “encumbered” shares? The reporting under Regulation 8A, as mentioned, does not require such disclosure. Keeping in spirit of the requirement, it may make sense that the Promoters/Company reveal both the information while disclosing the information under Regulation 8A. If not done, stock exchanges will have information of “pledged” shares under Regulation 8A and under clauses 35/41, disclosure would be shares pledged or encumbered.

4.      The form of reporting under Regulation 8A requires disclosure also of pledge “revoked”. But Regulation 8A does not require such disclosure. There are two ways to look at this. One is that, since the form provides for this item, disclosure should be made at the time of filing such information, though not required by the substantive provision. The other point arising out of this is that it may also be in the interests of the Promoters to voluntarily disclose the information about revocation of pledges at the earliest, preferably in the same manner as of creation of pledges.

5.      Is information relating to pledges a “price-sensitive information” and therefore be promptly disclosed? In todays post-Satyam, heavily sensitized atmosphere, even a rumor of shares pledged of a Company sends prices crashing down and the reverse, when pledges are revoked. In that context two questions arise. One is, whether the Company can wait for the full 7 working days it has under law before informing stock exchanges about the information of pledges that it receives? The other is, whether Promoters should disclose promptly information about “revocation” of pledges though not so required? Prudence would suggest that there should be no delay in disclosing such information, particularly when the quantity of shares involved is significant. However, SEBI could also tighten the wording to ensure this happens.

6.      There is some confusion on whether the Company should report information to stock exchanges relating to pledges on a quarterly basis. The disclosure formats and clauses 35/41 later introduced compound the confusion. However, on balance, it seems that the Company should disclose the information it receives within 7 working days of receipt and not wait till the quarter is complete.

A parting thought. Has SEBI finally brought in “Satyam-killer” amendments? There is sheer pressure of public opinion unjustified I think on regulators to take visible action. While the new requirements are very welcome, even too late as some would say, they are hardly “Satyam-killers” if one means by this that further Satyam-like episodes cannot happen. For one, the non-disclosure of “pledged” shares was a small part of the alleged scam. For the other, allegations in Satyam are about falsification and if documents relating to Rs. 7000 crores could be falsified, reports under Regulation 8A and Clauses 35/41 can hardly be expected to be truthful.

-       Jayant Thakur

9 comments:

Anonymous said...

Hello Mr. Thakur,

Following example {in connection with regulation 8A(4)}is to add/clarify to what you said for readers benefit in addition to my earlier comments in response to your earlier posting on pledge of shares --

1. Suppose, a director purchases 100 shares on 1-jan-09. This should be reported to the company within 7 working days.

2. The same director again purchases 100 shares on 1-feb-09. This also needs to be reported to the company within 7 working days.

3. On 1-Mar-09, the said director again purchases 24,801 shares. This also needs to be reported to the company within 7 working days.

Now following is the googly and companies needs to be careful:

4. In case of (1) & (2) above, the company need not report the respective disclosures (of 100 each) to stock exchange, because the aggregate is less than 25,000 shares.

5. But when the disclosure mentioned at (3) above is received, the company needs to disclose the aggregate of all the three disclosures to the stock exchanges because all the preceding two disclosures where though less than 25,000 shares, but the last disclosure of 24,801 shares has triggered the disclosure to stock exchanges i.e. for the quarter i.e. Jan-Mar, the aggregate shares pledged exceeds 25,000 shares i.e. 25,001 in the aforesaid example. Therefore company should disclose, the cumulative shares pledged during the said quarter and should not be under the impression that the disclosure is not required, as each of them are less than 25,000 shares.

Trust the above is clear (though confusing) and may be beneficial to learned readers.

Kind regards,
Yogesh Chande

Renu Gupta said...

Some thoughts of mine corresponding to your points.

1. Depending on the timing of the filing, the figfures disclosed should be uniform across all the 3 filings. I am unable to understand your concern on inconsistencies being created.

4. As stated as a comment to your previosu post, i am unable to understand the relevance of "revocation of pledge". Either there is a pledge or there is no pledge.Whether the pledge does not exist because it has been staisfied or because the parties have agreed to release it, how relevant is it?

Jayant Thakur, CA said...

Hi Renu,

Thanks for your points.

On the issue of differing requirements, my point is that Regulation 8A requires disclosure only of pledged shares while Clauses 35/41 require disclosure of pledged shares as also shares otherwise encumbered. This can obviously result in differing figures if promoters have encumbered some of their shares.

On issue of revocation, yes, you are right, the use of the word revocation does not seem wholly appropriate and a better word could have been used. Perhaps the intention is to cover also, taking your example, the release of pledge through satisfaction. Another way to look at it is that the revocation is by the Lender, usually if the loan is repaid. Of course, here too, the wording could have been better. Incidentally, the terminology used by depositories is "cancellation of entry of pledge".

- Jayant

Dhiraj said...

I feel that there is a gap of 14 working days (3 weeks) since the information of pledge or its invocation/revocation reaches to the public. It would have been much more effective, if the time line of Insider trading (2+2 days) should have been followed.

Further, in many cases, the promoters have entered into agreements with PEs for creating a negative lien on their shareholding in the Company or execute a Non-disposal undertaking. Whether, it would be covered under "shares encumbered or otherwise encumbered".

Its very tricky again.

Renu Gupta said...

An interesting article on the topic.

http://businesstoday.digitaltoday.in/index.php?option=com_content&task=view&id=9954&issueid=49

Anonymous said...

Below is a news article (page 13, yesterday’s edition of the ET) outlining one of the alternative ways being suggested to avoid calling an arrangement a “pledge”.

“It’s a two-way street here

Promoters are looking for new ways to work around SEBI’s regulation that requires them to disclose shares pledged by them. Recently, two promoters who had borrowed against their shares approached their lender with a simple proposal. In return for cancelling the pledge, the promoters would transfer shares to a depository account with the broking arm of the lender. The broking arm would also be given a power of attorney which would give it a right to sell the shares. The end result would be that the promoters’ leveraged status would remain undercover and the lender’s security would also not be compromised. With Tuesday being the last day for disclosures, it would soon be clear whether the lenders have agreed to the proposal.”

Would you say this is workable in light of your analysis?

Anonymous said...

This route will fall under the category of "otherwise encumbered".

Kind regards,
Yogesh Chande

maheshwari said...

Sir,

I have somedoubt in revised 8A(4) regulation. if there is no pledge of shares so 8A(4) is complied by the company stating NIL.

Jayant Thakur, CA said...

Hi Maheshwari,

Can you please elaborate a little on your query? I feel you are probably referring to the issue whether a disclosure is required Regulation 8A of an encumbrance not amounting to a pledge but would be happy if you express in more detail first. Thanks.

- Jayant Thakur