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Sebi to tighten disclosure norms for pledged shares

Plans to increase disclosures and widen the definition of encumbrance.

, ET Bureau|
Jun 25, 2019, 12.07 PM IST
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Mumbai: The Securities and Exchange Board of India (Sebi) is set to tighten disclosure norms for pledged shares to cover innovative and complex structures, said people with knowledge of the matter.

The board, which is likely to meet on June 27, is expected to discuss the proposal on pledged shares, tweak differential voting rights so founders can retain control and also discuss rules on royalty payments by listed companies, they said.

The regulator plans to widen the definition of encumbrance and increase disclosures required on encumbered shares by promoters. “Any kind of encumbrance — including any restriction on free and marketable titles to shares by whatever name called, executed directly or indirectly — will have to be disclosed,” said one of the persons. Currently, encumbrance covers pledge of shares, liens, negative liens and non-disposable undertakings.

“Any covenant, transaction, condition or arrangement in the nature of encumbrance by whatever name called, will have to be disclosed,” another person said.

The move comes in wake of the spotlight on mutual fund exposure to loans against share schemes.

Also, pledged share data disclosed by companies to stock exchanges doesn’t necessarily reflect the accurate picture as promoters borrow through various structures with shares as collateral. For instance, a structure where promoters “submit” shares to lenders through a power of attorney is popular. Although companies are required to disclose this to the stock exchanges, very few do it, thereby understating the extent of promoter share pledges.

The regulator may also mandate that they separately disclose wherever combined encumbrance of the promoters and persons acting in concert (PAC) crosses 20 per cent of total share capital in a company. Promoters may also have to declare on a yearly basis that they — along with PAC — have not made encumbrances directly or indirectly, other than those already disclosed during the fiscal.

Stock exchanges will have to maintain a database on this.
SEBI
The move comes in wake of the spotlight on mutual fund exposure to loans against share schemes.

Concept Extremely Broadly Defined

“If people are sidestepping the law, enforcement action needs to be taken,” said Sandeep Parekh, founder of Finsec Law Advisors. “However, the concept of encumbrance has been extremely broadly defined since the introduction of the new takeover code in 2011.”

The total value of shares pledged by promoters was more than ₹2 lakh crore and involved more than 800 companies, as of June 24, according to BSE data.

The regulator will also discuss the proposal on differential voting rights (DVRs) based on the recommendations by an expert committee.Such shares currently enjoy a higher dividend than ordinary shares, but have inferior voting rights. The expert panel has suggested allowing DVRs with superior voting rights for founders, so they can keep control of companies while selling stakes.

Sebi will take up a proposal to impose curbs on royalty payments by listed companies, such as those made to overseas parents for the use of brands and technologies.

The regulator wants toraise corporate governance standards by mandating approval of minority shareholders for any royalty payments by listed companies that exceed 2 per cent of annual turnover. Implementation of the rule was postponed to July from April after it was opposed by the finance ministry.
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