Pledged share funds under lens
The Economic Times, February 10, 2009, Page 1
Sebi To Seek Details On End Use Of Money Raised Via Pawned Shares
Ashish Rukhaiyar & Reena Zachariah MUMBAI
THE Securities and Exchange Board of India (Sebi) is planning to make it compulsory for promoters to disclose the end use of funds raised through pledging their shares with financiers, a move intended to increase transparency and provide more information to investors.
Such information would help investors find out if the money has been used to fund comparatively risky activities like property speculation, unrelated diversification or personal expenditure. The regulator is also considering putting in place rules to prevent misuse of the holding company structure by promoters to get around the disclosure requirements. Promoters often hold shares in the listed company through a privately-held offshoot. Technically, it is possible for them to raise money by pledging the equity of the unlisted company, which holds the listed company’s shares.
Though promoters must disclose the quantum of pledged shares in the listed entities, they need not reveal pledged shares in their holding companies, which in turn have a stake in the listed company. Many promoters, market participants say, may resort to the holding company structure to circumvent the norms on disclosure of pledged shares.
Market watchers said the data on pledged shares put up on the stock exchange websites do not reveal the full picture. Brokers say the practice of pledging shares is not new. What concerns investors is the purpose for which the funds were raised.
The Economic Times, February 10, 2009, Page 1
Sebi To Seek Details On End Use Of Money Raised Via Pawned Shares
Ashish Rukhaiyar & Reena Zachariah MUMBAI
THE Securities and Exchange Board of India (Sebi) is planning to make it compulsory for promoters to disclose the end use of funds raised through pledging their shares with financiers, a move intended to increase transparency and provide more information to investors.
Such information would help investors find out if the money has been used to fund comparatively risky activities like property speculation, unrelated diversification or personal expenditure. The regulator is also considering putting in place rules to prevent misuse of the holding company structure by promoters to get around the disclosure requirements. Promoters often hold shares in the listed company through a privately-held offshoot. Technically, it is possible for them to raise money by pledging the equity of the unlisted company, which holds the listed company’s shares.
Though promoters must disclose the quantum of pledged shares in the listed entities, they need not reveal pledged shares in their holding companies, which in turn have a stake in the listed company. Many promoters, market participants say, may resort to the holding company structure to circumvent the norms on disclosure of pledged shares.
Market watchers said the data on pledged shares put up on the stock exchange websites do not reveal the full picture. Brokers say the practice of pledging shares is not new. What concerns investors is the purpose for which the funds were raised.
Most promoters who have disclosed details of their pledged shares have said the money was raised for meeting working capital requirements. But brokers say there are many instances where the funds were used by promoters to raise their stakes in the listed entities through creeping acquisition, through conversion of warrants or simply to prop up the stock price. It is believed that some promoters also used this route to acquire personal assets.
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