Pledge disclosures: a rule or an exception?

Aloan against shares (especially shares of listed companies) is a mechanism routinely adopted by lenders to provide financing. However, the adverse market conditions and falling stock prices that have prevailed since early 2008 have led some lenders to invoke their pledges. This has triggered sales, including distressed sales, which in turn have accentuated the fall in share prices.

The markets have reacted strongly, as apart from promoters’ stakes being diluted, minority shareholders have suffered severe wealth erosion. Investors claim to have been cheated because the fact that promoters run the risk of losing a significant part of their shareholding when pledges are invoked is not in the public domain.

However, it is not entirely correct to state that this information is not in the public domain. The Securities and Exchange Board of India (SEBI) Substantial Acquisition of Shares and Takeovers Regulations, 1997, mandates any acquirer of shares or voting rights in a listed company (which, pursuant to an amendment to the regulations in 2002, includes a pledgee) to disclose any acquisitions beyond specified thresholds (starting as low as 5%) to the company and the stock exchanges.

Vandana Sekhri is a partner and Prachi Loona is an associate at Juris Corp. The firm is a full-service law firm based in Mumbai and specializes in financial transactions including capital markets and securities, banking, corporate restructuring and derivatives.