The Securities and Exchange Board of India (Sebi) has decided to introduce a new disclosure requirement — that of asking “promoters” to disclose the pledge of shares held by them. Sebi could have done better. The measure is a knee-jerk reaction to recent developments in the case of Satyam Computers Services Ltd where shares pledged by the promoters were sold in the market. While this column will not comment on the merits of the Satyam case (this author’s firm is advising that company’s statutory audit firm), it will look at how the objective of the recent regulatory response to a non-material aspect in Satyam, has not been met by the actual measure announced.A “promoter” under Indian securities laws is a person who is in control over a company and includes persons who formulate a plan for a securities offering. A quick review of just three aspects of Indian law on promoters will show how regulatory policy towards the concept of promoter is badly articulated and is, in fact, inherently inconsistent. The latest on disclosure of pledge of shares by promoters only adds to this patchy quilt.When a company makes an offering of securities it is required to make a range of disclosures about its promoters, such as the other businesses of the promoter, how those businesses have fared, and litigation that the promoter is involved in. The idea behind such disclosures is that a potential investor in a company offering its securities should know how well or badly other businesses under common control as the company have fared. This is quite logical – track record is always good to know.
However, guidelines governing public offering of securities mandate that the promoters should hold at least 20 per cent of the post-offering equity share capital of the company. Further, such minimum 20 per cent shares ought to have been held by the promoters for at least three years. Without these criteria being met, no company would have access to the Indian capital market. Such a requirement is anachronistic and discriminates against companies that seek to be board-driven and not have a single bunch of shareholders wielding control over them.
Funnily, after a company makes an offering and gets listed, the law does not have any prescripttion on minimum promoter holding. On the contrary, the listing agreement prescribes a cap on promoter shareholding. This provision is logical because regulatory policy can legitimately mandate that unless the public has significant interest in a company, and unless there is a sizeable float of securities for trading, members of the general public ought not to be exposed to the risk of investing in its shares.As a result of such patchiness, amidst thousands of companies that mandatorily have to bear the burden of maintaining promoter shareholding, there indeed are a few companies that after listing have no promoters.Ironically notable cases in point are those of Larsen & Toubro and Housing Development Finance Corporation. The former is in the news for being a candidate to take over Satyam while the Chairman of the latter is spearheading efforts to keep Satyam alive, at the instance of the government.
Yet, the recently announced measure on special disclosure of share pledge by promoters leaves out the real issue of mandating disclosure of all forms of price-sensitive information and proceeds on the footing that the concept of promoter is crucial. What is important is not just what the promoter is doing with his shares, but what people who are in management of a listed company are doing with their shares. In Satyam itself, the shareholding of the promoter was an inconsequential single-digit percentage point (around 7 per cent). A pledge over such a tiny holding and an invocation of such pledge hardly changed anything.
The very fact that someone holding 7 per cent could control a company meant that the level of shareholding is no consequence. However, the invocation of the pledge took a life of its own with uninformed media reports covering every micro-element that could be written about in the case. Some spoke of a “clandestine pledge” (the law to report a promoter pledge is only now being announced), others wrote of “lacunae in the law” (the law always required purchases and sales, and pledges at specified thresholds to be reported). However, the regulatory system has reacted to media reports.
If a key insider sells shares, his bearishness towards his own company, or his intention to encash the value enjoyed by his company in the market, would itself be price-sensitive information. Therefore, the law already mandates such disclosure. One could easily add the creation of a pledge to such disclosures so that any insider seeking to bank and monetise his holding beyond some material threshold could be asked to make disclosure, treating a pledge by such a person as price-sensitive information.
Instead of singling out share pledges by promoters, SEBI would do well to altogether dispense with the minimum promoter shareholding requirement imposed at the time of listing. Companies should not be forced by law to have “promoters”. The stance of regulation should be do encourage board-driven governance and discourage the promoter concept. In that sense, the reactive legislation on disclosure of pledge could well represent an opportunity lost.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)
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