Recent SEBI amendments to pledge disclosures

By Jyotika Bajaj and Medha Unadkat, SNG & Partners
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Raising debt by pledging shares is a common practice in the banking and finance industry. However, pledging the shares of a listed company has a direct impact on the marketability of those shares, and affects investments of retail investors.

The calling in of a pledge by the lenders following a borrower’s default can lead to a distress sale, which will eventually reduce the value of the assets in the hands of investors.

Jyotika-Bajaj-2-SNG-&-Partners
Jyotika Bajaj
Senior associate
SNG & Partners

To minimize the impact of pledged shares, the Securities and Exchange Board of India (SEBI) in 2009 introduced a requirement that the promoters of a listed company should disclose the pledge of shares, and an ensuing
disclosure by the company to stock exchanges. Many changes have since been made, both in the format and timing of these required disclosures.

An important change in disclosure requirements followed the Satyam scam. The price of shares in that company crashed following a series of revelations, including that the shares of the promoter had been pledged to banks. The term pledge was replaced with encumbrance to include pledges, liens and other restrictions placed on promoters’ shares of listed companies. However, companies and their promoters have managed to structure transactions in creative ways to evade this requirement. In August 2019, the SEBI announced an amendment to its Substantial Acquisition and Takeover of Shares Regulations, 2011, making the scope of encumbrances all-encompassing. This change was brought into effect following the distress sale of pledged shares by the lenders of Zee Entertainment, Sun Pharma and Reliance Group.

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SNG & Partners has offices in New Delhi, Mumbai and Singapore. Jyotika Bajaj is a senior associate and Medha Unadkat is a legal consultant.

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