The Hindu Business Line : The tale of pledges

The steady stream of announcements in the past week from listed companies on shares pledged by promoters should go a long way towards greater information-based trading in the country’s stock exchanges. Pledging of shares by promoters, whether to fund their diversification into other business ventures or merely as an additional layer of comfort to bankers extending credit facilities to the company, has the potential to increase the free floating stock of shares and ex ert downward pressure on prices.

Investors in the secondary market, thus, have a right to know of such a development so that they can adequately factor in the risk. But all pledges by promoters are not the same. Some pledges are collaterals for loans taken by the companies concerned; these send a message about the promoters’ commitment to the cause. On the other hand, when promoters raise money for ventures that are unrelated to the business of the listed company whose shares have been pledged, that could signal for shareholders the danger of managerial attention being frittered away in focusing on the newer venture, often to the detriment of the interests of the listed company. The risk remains unaltered even in situations where the company itself promotes a new venture and requires debt funding and is thus forced to pledge its shares in the new company. Finance theory is replete with instances of value erosion due to what is recognised as a ‘conglomerate risk’. While investigations into the affairs at Satyam are still on, what seems evident even at this stage is that the company could have avoided at least some of the embarrassment had its promoters not over-extended themselves in a host of real estate and infrastructure businesses. It is therefore important that the purpose of the pledges be revealed.

The requirement will no doubt place in the public domain financial affairs of promoters that are traditionally regarded as strictly in their private realm. Viewed thus the latest SEBI directive to stock exchanges may seem somewhat harsh on the promoters’ right to privacy. Against this must be set the fact that when an individual undertakes public responsibilities, as when he raises money from the investing public for funding a business venture, he must be prepared to be judged by different yardsticks. The position is somewhat analogous to individuals contesting for public offices having to disclose details of their financial net worth. If there is one criticism of SEBI’s action it is in its overarching belief in stock exchanges’ ability to enforce effective oversight on such transactions. Instead, SEBI would be better off making dematerialisation of promoters’ shareholding compulsory and make depositories register charges against pledged shares and furnish details of the same to stock exchanges.

Related Stories:
Tata Sons pledges 14.6% stake in Tata Steel, 13% in Tata Power
Cos will have to disclose pledged shares: SEBI
Poser on share pledging
Cos start divulging pledged share data