The revelations made by Ramalinga Raju, former Chairman of
Satyam Computers Ltd., have prompted India's capital
market regulator, Securities and Exchange Board of
India (SEBI), to frame rules for disclosing the details of the shares
pledged by the promoters of the listed companies. Raising money by
pledging their shares as collateral with a bank or any other institution
that lends, is quite common among the promoters of the listed
companies. The borrowed money is either used to meet the company
related expenses, or for personal reasons. There are several intricate
issues related to pledging of a company's shares by its promoters,
which need to be scanned by the regulator. Developed markets, like the
US and UK, have prescribed norms for disclosure of pledged
share details by the promoters, directors and senior employees of
the companies. However, SEBI did not react until the Satyam
episode. Perhaps it did not anticipate the impact of such actions by
promoters on the markets.
Drastic drop in Satyam's share price and the resultant losses
to investors following a series of incidents made the markets jittery.
A thorough investigation into the company's dealings brought
to light the mishaps associated with pledging of shares by
the promoters. Therefore, SEBI made it mandatory for promoters of
all the listed companies to disclose the details of shares pledged by
them. Following the rolling out of the norms, about 467 listed
companies have disclosed the amount of shares pledged by their promoters,
out of which promoters of nearly 114 firms pledged over 50% of
their stakes. SEBI as well as the market players, have been taken
by surprise by these disclosures. In fact, the revelations at Satyam
gave a kind of a wake up call to the regulators across the worldthey
need to be proactive, rather than react to an incident.
After Ramalinga Raju's audacious act of raising nearly Rs. 1,230
cr by pledging his entire shareholding with a broker came to light,
the ill effects of pledging shares became open to the public. Keeping
aside Satyam, promoters often take this route for raising money when other sources of financing
have been exhausted. Normally, lenders (with whom the shares are pledged) lend 60% of the value
of shares pledged. The remaining 40% is kept as the lender's margin, and they expect the promoters
to maintain that margin at all times. As long as the promoters pay back the amount in a
stipulated time or the value of the company's stock remains same or is rising, there are no hassles at all.
The problem arises only when the value of the pledged stock falls. |
