The Securities and Exchange Board of India (Sebi) has finally made it mandatory for promoters of companies to disclose details of shares pledged by them. The move,first reported by The Indian Express today,follows Satyam Computer Services Ltd promoter B Ramalinga Rajus admission that he clandestinely raised funds by pledging his shares in the company.
While Rajus fraud got caught,ironically only after he made it public,the practice of pledging shares is rampant in corporate India in the absence of any regulatory requirement to make such disclosures to investors. Some promoters had done so to hike their holding in companies while others used the money to ramp up share prices, said Ashok Ajmera,CEO,Ajcon Global.
Promoters of nearly 200 companies have pledged their shares. Of this,25-30 are believed to be in trouble as they are unable to raise the required funds to meet the shortfall following the market crash. If the securities pledged for raising money decreased in value beyond a certain point,the borrower would be forced either to deposit more money in the account or allow the lender to sell off some of borrowers assets,Ajmera said.
Sebi said that the disclosures should 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 or sale of pledged shares should be made to the company and the company should in turn inform the same to the public through the stock exchanges, Sebi chairman CB Bhave said after a board meeting in Mumbai.
The details of disclosure,which should be made in two stages event-based and periodical will be notified shortly after amending the relevant regulations and listing agreements,Sebi said. Promoters will first inform the company which will,in turn,disclose it to the stock exchanges. As the Raju family pledged their holdings at a time when the Satyam stock was quoting at a high level,they would have already pocketed a huge amount even after taking into account the lenders margin.
If the Rajus had pledged the shares when the share price was above Rs 500,he would have got around Rs 1,400 crore (as against the actual value of Rs 2,800 crore) from the lenders. Lenders normally slap a margin money (the difference in the value of shares pledged and the loan amount sanctioned) of 50 per cent for physical shares. If a promoter wants to borrow Rs 100 crore,then he will have to pledge shares worth Rs 200 crore. The margin for demat shares could be even less at 35 per cent as electronic transfer is faster and cheaper.
Regarding the peer review of audit of accounts of large companies,Bhave said,The board has taken note of it. He said the regulator is in the process of appointing a panel of auditors for the peer review. With regard to the progress of investigations into the Satyam scam,he said,The investigations are at a stage where we cannot disclose anything. We are trying to complete the investigation as fast as humanly possible.
Although SEBI has not been able to quiz Raju,he said investigating agencies are operating in coordination with each other. Each agency will decide on course of action depending upon the offence committed. If the offence is under SEBI regulations,SEBI would act,if it is under Corporate Affairs ministry,the ministry will take action and if it it is under criminal law,the police will decide,Bhave said.
On a question whether the compensation of independent directors is too high,including ESOPs and other benefits apart from their sitting fees,Bhave said,I dont think it is the regulators prerogative to decide whether Rs 10,000 or Rs 10 lakh is good enough for an independent director.