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 today’s 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