Shares of GTL Ltd and GTL Infrastructure had nosedived by 62 and 43 per cent, respectively on the BSE on June 20, on several rumours; one of them being that the promoter's own shares of the company that had been pledged were being sold off by the financiers, and that margin calls had been triggered.

(The promoters said none of its shares had been sold off that day, though one month later, they announced that ICICI Bank had invoked promoter-pledged shares worth 29.3 per cent stake in the company.)

However, sudden negative news does send a stock plunging, and the question is whether the minority investor can be forewarned in such cases.

One section of the market has it that in the case of pledged shares, it is possible to keep the entire development transparent in the public eye by routing all such transactions through the market so that when margin calls happen, it is known to all.

Systemic deficiency

There have been sudden news about Satyam Computer reporting fraud or SBI suddenly reporting very low profits because of provisioning, and their scrips falling on the bourses as a result. But these were more of corporate governance issues, says Mr Deven Choksey, Managing Director at KR Choskey Shares and Securities.

“In the case of GTL it is a systemic deficiency where the pledged shares and funded position stayed out of the market.”

According to him, all funded positions for listed companies should only be taken through the market route for lending and borrowing of funds against shares. He has written a note to SEBI recommending this.

It is a position that also finds backing from such persons as Ms Deena Mehta, Managing Director of Asit C Mehta Investment Intermediaries Ltd (and earlier head of BSE).

Regulatory arbitrage

Currently, there is a lot of regulatory arbitrage because margin trading is regulated by SEBI, whereas NBFCs are regulated by RBI, and they have little curbs on lending, she said: “Earlier (when there was badla) we used to know the outstanding exposures in the market. But what is in the books of these NBFCs nobody knows.”

At present, such positions are taken outside the market between banks or NBFCs and borrowers. When the lender sells shares to secure his dues, there it has a drastic impact on the scrip of the concerned company.

Although SEBI mandates that the promoters report to the stock exchanges any pledge of their own shares for loans, this is not the same as having the entire process happen within the market system, says Mr Choksey

“In the same way that online open interest positions give an indication of where the derivatives market stands, if lending and borrowing of shares for funds happens within the system, one gets a continuous online indication of the position. In this case investors would know what is coming,” he said.

The entire trade would have remained in the market and stood disclosed in the market.

According to him, this will also allow for larger borrowings and at lower interest rates. Currently loans against shares can command up to 36-37 per cent interest from NBFCs. Borrowing rates could come down substantially if it is within the market system, he says.

This will also expand the size of the market.

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