Transparency please!

The recent allegation by the Anil Ambani-led Reliance group that the sale of pledged shares of group companies by two leading finance companies was illegal and needs to be investigated, helps highlight the risks faced by investors through this practice. The sellers have claimed that the sale was as per contractual rights and that the shares were invoked due to the Reliance ADAG group defaulting on its margin commitment. While it is up to the market regulator, the Securities and Exchange Board of India, to determine if there was anything underhand in the sale, investors have been the worst affected in this episode — the value of their holdings in Reliance Power, Reliance Capital and Reliance Infrastructure eroded between 30 and 60 per cent in just four sessions, due to the share sale by the lenders.

Pledging of shares by promoters is not illegal or wrong since a large chunk of their assets could be in the form of shares held in the companies that they have formed. Loans are commonly taken against these shares to meet personal and, at times, business needs. Of the 2,735 listed companies in the country, promoters of 637 companies have used their shares as collateral to take loans. In 2009, the market regulator made it mandatory for promoters to disclose details of shares pledged, invoked or released, within a stipulated time. Further, details of pledged shares need to be included in the quarterly filing on shareholding pattern. These rules do serve as a warning to vigilant investors, who keep a close watch on all company announcements. But it is highly likely that many lay investors are not tracking these announcements closely enough. Of the current list of companies whose promoters have pledged shares, 57 companies have almost the entire promoters’ holding pledged, while 252 companies have more than 50 per cent of shares pledged to raise capital. It is interesting to note that the average price decline in these 252 companies over the last two years is 43 per cent. In other words, companies with high proportion of pledged shares have not fared well at the bourses either; posing a strong risk to investors.

The market regulator could ask the exchanges to publish a monthly list of companies with more than 50 per cent of promoter holding pledged on their websites. . Further, lenders should be asked to notify the exchange if the promoter delays or defaults on repayment obligations. Of greater importance is the need to look in to mutual funds lending to promoters against their shareholding. It is reported that more than ₹25,000 crore has been lent to few companies by mutual funds and some of them are currently unable to meet the margin calls. SEBI needs to monitor such investments more closely. Disclosure of such exposures in debt or liquid funds needs to be enhanced. Mutual fund trustees should also play a more active role in vetting such exposures.

COMMENT NOW