In Adani's NDTV bid hangs a cautionary tale

This is the practice of getting loans by pledging shares and is as old as trading in Indian markets. It was primarily meant as a tool for stock market operators who used their existing shares as security to borrow and trade in the market. However, with time, it has become the go-to product for promoters of companies who pledge their own shares to raise funds. This is often termed as ‘selling (pledging) the family silver’. For banks, too, this is the best form of guarantee, as shares can be valued and sold easily in the open market or to third party buyers in case of default by the borrowing company.

Do shareholders get to know about this?

According to Securities and Exchange Board of India (Sebi) regulations, any form of pledge or encumbrance (restrictions on the sale or transfer of shares) needs to be disclosed, along with the nature of the encumbrance. The idea is to make shareholders aware that the ownership of the shares could change in case of loan default. However, such disclosures, over the years, have not been uniform and there have been multiple instances of lack of disclosures as well as misleading disclosures. Sebi, on 27 June 2019, tightened the disclosure standards on share pledges to ensure that all direct and indirect encumbrances are disclosed.

Does exercising warrants need management’s nod?

No. Pledge agreements come with the right to sell shares, convert warrants into equity, and take ownership of shares if loans remain unpaid. Legally, the lender with whom shares are pledged do not need to inform the borrower company that it has taken possession of shares or is exercising warrants. However, in some cases, lenders have consulted the management.

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Did NDTV disclose the encumbrance?

NDTV uploaded pledge details on 8 November 2019 with the BSE, after Sebi tightened disclosure standards. In its disclosure, NDTV spoke about two loan agreements with VPCL signed on 21 July, 2009 and 25 January, 2010. “RRPR has been advised that the loan agree-ments do not create encumbran-ce as per the disclosures prescribed by Sebi," it said. As per the loan pact, RRPR cannot sell or transfer shares or create encumbrances without VPCL’s consent. NDTV did not disclose the possibility that it could lose ownership of the shares.

What can promoters do in such cases?

The loan needs to be repaid according to the terms laid down in the share pledge agreements. There are cases in the Supreme Court where the rights of lenders in such agreements have been debated. “A debt is not discharged till there has been an actual sale of the pledged items," the Supreme Court had ruled in May 2022.  The only option left for NDTV is to buy out the 26% during the open offer at a price better than what Adani Group is offering, or find another buyer to make a competing offer.

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