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Share-pledges demystified

business Updated: Jan 21, 2009 22:09 IST
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What is pledging of shares?

It is a process where the person who owns shares of a company makes a request to the depository participant to pledge it in the name of the lender that is providing the loan against those shares.

What has SEBI done?

It has decided to make it mandatory on the part of promoters (including promoter group) to disclose the details of pledged shares held by them. Till now it was not mandatory to disclose the pledging of shares by promoters. “It used to act as a backdoor exit route for promoters and needed to be plugged,” said the head of a leading broking firm.

When does this disclosure have to be made?

It has to be an ‘event based disclosure’ and will have to be made as and when the shares are pledged by the promoters. Along with this periodic disclosures, every quarter, will also be required.

What did Raju Do?

Raju pledged shares of Satyam held by him to lenders in the market and reduced his stake in the company to less than 3 per cent, against 8.6 per cent that was officially disclosed.

When will it be applicable?

While amendments to the listing agreement are underway, disclosures will have to begin with effect from December 31, 2008.

How will it help?

Making the disclosure of pledging of shares mandatory will provide investors with details of any move by promoters to reduce their stake from the company. “Any increase in pledging of shares by the promoter will come as a warning signal for the investors and will raise their concerns,” an analyst with a brokerage said. It will also make investors aware that how much stake the promoters actually holding in the company as against what is disclosed on paper.