SEBI has finally decided to make disclosure of shares held by Promoters in listed entities owned by them mandatory (see the press release). The relevant paragraph reads as under:-
“To enhance the disclosure requirements, SEBI Board, in its meeting held today, decided to make it mandatory on the part of promoters (including promoter group) to disclose the details of pledge of shares held by them in listed entities promoted by them. Such disclosures shall be made as and when the shares are pledged (“event based disclosure”) as well as by way of periodic disclosures. Necessary steps to amend the relevant regulations and the listing agreement are being taken.
Details of pledge of shares and release/ sale of “pledged shares” shall be made to the company and the company shall in turn inform the same to the public through the Stock Exchanges.”
Some quick comments while we await the formal amendments to law:-
– It is presently only a decision. The amendments will be made to “Regulations” and the Listing Agreement. Let us see which of the Regulations are amended.
– The disclosure appears to be required only by the Promoters and not by directors, officers, etc. I highlight this particularly to contrast Indian requirements with those in the West and also since the intention appears to be to curb insider trading.
– There will be “event-based” disclosures and also periodic disclosures. This is consistent with existing disclosure requirements for sale/purchase under the SEBI Takeover Regulations and under the Insider Trading Regulations. However, under these Regulations, there is minimum particular threshold that is specified and disclosure is required from reaching that threshold. Let us see what the disclosure for pledge is – for even any quantity of shares pledged or only if certain minimum shares are pledged or additionally pledged.
The shareholding of Promoters and disclosure of pledge of Promoters’ holding is fraught with complexities of facts and law. Let us see the actual wording of the Regulations and the Listing Agreement and see how well these complexities are covered.
Requiring disclosure of shares pledged by Promoters is certainly a forward step and desirable. At the very least, shareholders can know how much “stake” the Promoters really have in the Company. There are other advantages too.
However, critical also is that the pledges are fairly disclosed so that the public understands the nature of the pledge, the amount of monies raised, the use to which the monies raised are put to, etc. One will need to see whether the information required to be disclosed alongwith is sufficient so that readers can understand the context well. I believe that even if there are no additional informational requirements, Promoters can and should give additional disclosures to put the pledge in context.
Also, one wonders whether this will prevent the lacuna allegedly exposed by the Satyam episode of Promoters’ pledged shares being sold out and raising concerns of Insider Trading. The argument is that if there was such a requirement, then the gradual reduction of holding of Promoters of Satyam from 25% to 8% and then finally to 3% would have been known to the public. One does not know the real facts in Satyam’s case. However, it is apparent that there are already requirements under the Takeover Regulations and the Insider Trading Regulations for periodic disclosure of sale of shares. The disclosure is, inter alia, at every 2% sale. Thus, Promoters of Satyam were already required to disclose at every stage from 25% viz., 23%, 21%, 19% and so on. Were these disclosures made? Were they made in time? And if they were made, then the public already knew about it. But, the most important question is, did they make these disclosures?! And if they did not, even if they were legally required to do so, would they have made such disclosures even under the new law? A person bent on committing a big crime would not hesitate to commit smaller crimes.
Be as it may be, this is a step forward. Let us see the actual law and see how good the coverage is.
– Jayant Thakur