Promoters must disclose pledged shares: Sebi

Capital markets regulator Securities and Exchange Board of India (Sebi) has made it mandatory for promoters to disclose details of shares pledged by them in their listed entities. Sebi has mandated two kinds of disclosures — 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 the stock exchanges. For event-based disclosures, Sebi will change the regulations and for periodic disclosures it will amend the listing agreement. "When we notify this, details about the timeframe will be given. We will be reasonable. This is the first time disclosures are being made. We will also specify the dates from which the event-based disclosures will have to be made," Sebi Chairman C B Bhave said at a press conference after the Sebi board meeting. Sebi will ask for periodic disclosures starting December 31, 2008 Bhave, however, clarified that promoters do not need to disclose whether they have pledged shares of the holding company of a listed entity. Promoters will, however, need to make adequate disclosures if the lenders sell the pledged shares in the open market . The changes will also apply to offshore transactions. "A pledge is a pledge. We are not making a distinction between offshore and onshore lenders. If the shares are pledged, the information must be disclosed," Bhave said. The extent of disclosure was also an issue, corporate lawyers had said. For instance, if a promoter raises his shareholding to 5 or 10 per cent, he currently has to disclose his aggregate shareholding under the takeover code. Bhave has, however, clarified that for event-based disclosures, there will be limits on how much the promoter has to disclose. For periodic disclosures, there will be no limits. The disclosure will clearly have to say how many shares are encumbered. Sebi's decisions today came after the regulator's primary market advisory committee had 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 had observed. Promoters of at least 150 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, who 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, then he will be liable under the insider trading guidelines," Bhave clarified.