Mumbai: The country’s capital markets regulator has taken another step towards improving transparency and tightening disclosure of share transactions by company promoters.
The regulator is seeking information including details on the power of attorney vested in others by promoters, as well as on conversion of shares from demat to physical form, according to two persons familiar with the development.
Fair play: Sebi’s headquarters in Mumbai. The markets regulator has been trying to increase transparency in promoter transactions. Abhijit Bhatlekar / Mint
The Securities and Exchange Board of India, or Sebi, has asked share registrar and transfer, or R&T, agents to provide such information on a weekly basis, along with details of any change in shareholding because of the sale or purchase of stock by company promoters.
“Sebi sent us a list of promoters in April and, since then, every week we send detailed information of (any) change in promoter shareholding to the regulator,” said a senior official at one R&T agent.
R&T agents are appointed by companies to process all functions related to share transfers.
The Sebi spokesperson was not available over the weekend to comment on the matter.
Sebi’s move is aimed at gleaning accurate information on share pledges by promoters, who may use the power-of-attorney route, particularly for shares held in a physical form, to avoid disclosing stock pledges.
A power of attorney is a legal document that enables an investor to designate another person or entity to act on behalf of the original shareholder.
Sebi has been trying to improve transparency on promoter transactions. In January, the regulator made it compulsory for listed entities to disclose information on share pledges made by promoters to any entity including banks and financial institutions.
The markets watchdog acted after it found that Satyam Computer Services Ltd founder B. Ramalinga Raju, who confessed to a Rs7,136 crore accounting fraud on 7 January, had pledged nearly all his shareholding in the company with lenders to raise finances.
Shareholders have the option to hold shares in either physical or demat (electronic) form. They need to open a demat account with depository participants that charge shareholders a maintenance fee for holding the stock in custody, and provide updates on their portfolio at regular intervals.
Companies encourage shareholders to hold their stock in demat form for safe dealing and ready liquidity. India has two depositories—the National Securities Depository Ltd and Central Depository Services Ltd—that hold securities in an electronic format.
An executive at one of the depositories confirmed the latest directive by Sebi.
In January, Sebi set a 31 March deadline for companies to disclose information to stock exchanges about share pledges by promoters. The promoters of 667 listed Indian firms pledged their shareholdings as collateral to lenders to raise funds, according to data filed by these firms to stock exchanges.
Following the Sebi directive, Indian firms had to change the format of quarterly earnings too, incorporating details on promoter holdings and the status of their share pledges.
Sebi has not yet sought details from promoters on the end use of the money they raised by pledging their holdings, at what price the deal had been done and to whom the shares were pledged. It has also refrained from seeking details on shares pledged by unlisted holding firms.
“After Sebi’s norms on pledged shares, many companies started disclosing the data on pledged shares, but (a) few circumvented (the rule), using the power-of-attorney route,” said a person familiar with the development, who didn’t want to be named.
“Sebi is closely watching promoter holdings and any discrepancy between what the company has disclosed and what the exact position is,” said this person.
Following the Sebi order, R&T agents have started sending beneficiary ownership statements every week to the regulator on shareholdings of all promoters that have given the power of attorney to their lenders. Sebi is expected to initiate action against any promoter who has not made a full disclosure.
To be sure, there is nothing illegal about promoters pledging shares. Investment bankers say that private lenders have always asked for shares to be put up as collateral when they lend money.
The lender advances funds depending on the market price of the shares. When the share price declines, lenders typically ask for additional shares to be pledged as collateral. If the borrowers fail to reinforce the collateral, a margin call is triggered and lenders sell the pledged shares to recover their money.
Many promoters who had pledged their shares faced the risk of lenders selling the collateral after the Bombay Stock Exchange’s benchmark index, the Sensex, plunged a record 52% last year. The situation has changed, with the Sensex rising 87% since 9 March on a return of investor confidence.