Disclosure of reasons for encumbrance by a promoter of listed Companies

Highlights 

The companies would now have to furnish detailed reasons for any kind of encumbrance on shares belonging towards the promoters. The new rule would be applicable to listed companies for which the combined encumbrance on promoter shares exceeds half of their shareholding or a fifth of the total shareholding. The regulator had first stated the new rules around share pledging in June but a thorough circular was issued.

Amongst the details corporations have to furnish are end-use of money as well as security cover provided. They would also have to state if the encumbrance linked to any debt instrument and its credit rating. Furthermore, disclosures would have to be made within two days of the creation of encumbrance.

SEBI had of late widened the definition of encumbrance towards including direct and indirect pledge, liens and non-disposal undertakings (NDUs).

Securities and Exchange Board of India new rule for additional disclosure requirements for encumbrance by promoters of listed companies.

Market regulator the Securities and Exchange Board of India (SEBI) recently stated additional disclosure requirements for encumbrance through promoters of listed firms.
In its circular, SEBI directed every listed company to disclose detailed reasons for pledging of shares through its promoters along with the amount of stake pledged within 2 days if the total amount of shares pledged through the promoter or the promoter group crosses 50% of the total stake held by the promoter or if it is above 20% of the concerned corporation’s total share capital.

Besides, promoters are required to disclose the thorough reasons for encumbrance (for example end use of the money relating to any debt instruments like debenture, commercial paper, certificate of deposit, and the name of the corporation in whose favor the encumbrance is made) if the combined encumbrance equals or go beyond 20% of the firm’s share capital. The circular also stated that such encumbrance must be disclosed within 2 working days to the corporation and the exchanges where the shares are listed. 

Presently, a listed company requires disclosing concerning share pledges by its promoters within 7 days of such an action.

SEBI stated that in order to bring better transparency relating to the reasons for encumbrance, mainly when important shareholding through promoter along with persons acting in him (PACs) is encumbered, it was decided to recommend additional disclosure standards on share pledging.

SEBI also stated that such disclosures would be warranted on every occasion, when the extent of encumbrance, having already breached the above threshold limits, rises further from the prevailing levels.

At the present time, listed corporations are required to disclose the amount of share pledge through promoters as well as its change along with short basic reasons for such pledging.

SEBI added that if the existing combined encumbrance through the promoter along with PACs with him is either 50% or more of their shareholding in the corporation or 20% or more of the total share capital of the corporation as on 30th September, 2019, the individual has to specifically make first disclosure on thorough reasons by 4th October, 2019.

The regulator likewise directed stock exchanges in order to maintain as well as individually disseminate the list of such corporations together with particulars of encumbrance and reasons for an encumbrance on their websites.

The listed corporations are required to upload the report on their websites concerning disclosure of reasons for encumbrance within 2 working days of receipt of such disclosures.

The Securities and Exchange Board of India (SEBI) stated that the provisions of this circular would come into effect from 1st October 2019.

Author:

eStartIndia Team