Pledge of shares by promoter entities
– concerns involved, regulatory framework and need for additional disclosures
– Anushka Vohra, Manager | corplaw@vinodkothari.com
Background
It is common for promoter / promoter companies (HoldCo) to raise funds by way of pledging their shares held in operating companies (OpCo). This is known as loan against securities (LAS). LAS enables borrowers to raise funds from banks / NBFCs by keeping shares, mutual funds or life insurance policies as collateral. There are specific regulations issued by RBI with respect to LAS.
As on March 6, 2023[1], there are 239 companies that have reported promoter pledge on BSE. Pledging of shares by promoter companies held in operating companies does not raise a red flag per-se, however one has to know, (i) the percentage of shareholding pledged by promoters / promoter companies viz-a-viz the paid up share capital held, that is to say the unencumbered shares, (ii) leverage at the group level; (iii) impact of default.
In this article, the author tries to highlight the concerns arising from pledging of shares held in OpCo by HoldCo, the disclosure provisions currently prevailing w.r.t. the pledged shares, and the need for additional disclosures.
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