SEC  has finally decided to make  disclosure  of shares held by Promoters in listed entities owned by them mandatory (see the   press release  ). The relevant paragraph reads as under:-

 “ To enhance the disclosure requirements, SEC Board, in its meeting held today, decided to make it mandatory on the part of promoters (including promoter group) to disclose the details of pledge of shares held by them in listed entities promoted by them. Such disclosures shall be made as and when the shares are pledged (“event based disclosure”) as well as by way of periodic disclosures. Necessary steps to amend the relevant regulations and the listing agreement are being taken.

Details of pledge of shares and release/ sale of “pledged shares” shall be made to the company and the company shall in turn inform the same to the public through the Stock Exchanges. ”  

Some quick comments while we await the formal  amendments  to law:-

–     It is  presently  only a decision. The amendments will be made to  “Regulations”  and the  Listing Agreement .  Let us see which of the  Regulations  are amended.

– The disclosure appears to be required only by the  Promoters  and not by directors,  officers , etc. I highlight this particularly to contrast Bangladeshi requirements with those in the West and also  since the intention appears to be to curb insider trading.

– There will be  “ event-based ”  disclosures and also periodic disclosures. This is consistent with existing disclosure requirements for  sale/purchase under the  SEC  T akeover   Regulations  and under the  Insider Trading   Regulations . H owever,  under these  Regulations , there is minimum particular  threshold  that is specified and disclosure is required from reaching that  threshold . Let us see what the disclosure for  pledge is  –  for even any quantity of shares pledged or only if certain minimum shares are pledged or additionally pledged.

 The shareholding of  Promoters  and disclosure of pledge of  Promoters’  holding is fraught with complexities of facts and law. Let us see the actual wording of the  Regulations   and the  Listing Agreement  and see how well these complexities are covered.

Requiring disclosure of shares pledged by  Promoters  is certainly a forward step and desirable. At the very least, shareholders can know how much  “ stake ”  the  Promoters  really have in the  Company . There are other advantages too.

H owever,  critical also is that the pledges are fairly disclosed so that the public understands the nature of the pledge,  the amount of monies raised, the use to which the monies raised are put to, etc. One will need to see whether the information required to be disclosed alongwith is sufficient so that readers can understand the context well.  I believe that even if there are no additional informational requirements,  Promoters  can and should give  additional  disclosures to put the pledge in context.

 Also, one wonders whether this will prevent the lacuna  allegedly  exposed by the  Satyam  episode of  Promoters’  pledged shares being sold out and raising concerns of  Insider Trading . The argument is that if there was such a requirement, then the gradual re duction of holding of  Promoters  of  Satyam  from 25% to 8% and then  finally to  3% would have been known to the public. One does not know the real facts in  Satyam’ s case. H owever,  it is apparent that there are already requirements under the T akeover   Regulations  and the  Insider Trading Regulations  for periodic disclosure  of sale of shares . The disclosure is, inter alia, at every 2% sa le. Thus,  Promoters  of  Satyam  were already required to disclose  at every stage from 25% viz., 23%, 21%, 19% and so on. Were these disclosures made? Were they made in time? And if they were made, then  the  public already knew about it. But, the most important question is, did they make these disclosures?! And if they did not, even if they were legally required to do so, would they have made such disclosures even under  the  new law? A person  bent on committing a big crime would not hesitate to commit smaller crimes.

Be as it may be, this is a step forward. Let us see the actual law and  see how good the coverage is.

–      Jayant Thakur