SEBI asks promoters to reveal pledged shares information

It seems that after the Satyam fiasco, SEBI is asking promoters to reveal information about pledged shares. I do not think that this step will do any good. Promoters will reveal the information and after some time people will forget about it.

According to me, SEBI should take the following steps:

(a) Promoters should only be allowed to pledge shares only for loans raised for the same company in which he holds the shares. What is happening now is that promoters pledge shares to start other businesses thus over extending themselves. For instance, Raju was pledging his shares to start other business where he would have majority shareholding. He overextended himself and resorted to diversion of funds. Such a step will also ensure that the promoter’s interest remains in the company in which he is holding the shares.

(b) If the promoter is allowed to pledge shares so that he can invest other businesses, then his voting rights should come down by the number of shares so pledged. As it is most of the promoters have small shareholding and they control huge companies. Their power and control over huge resources is highly disproportionate to their shareholding. On top of this, the financial institutions which hold a large percent share of various companies generally do not vote against the incumbent government. So the promoter ends up controlling the company with hardly any investment as Raju did.

The basic principle behind my suggestion is something that I learnt long time back working for Escorts, the tractor manufacturer. I realized that only those dealerships were run efficiently and effectively which had owners managing it, that is, the person whose money was involved in the business. In the case of promoters who have pledged most of their shareholding and invested money elsewhere, we are under the illusion that the company is being run by a person who has money invested in it. But the reality is different. By pledging his shares, he has become a surrogate owner and as such his interest in managing the company effectively is diminished. By pledging his shares, he has more or less reduced his investment in the company.

If the interest of the promoter is to start other businesses, then logically he should leave the management of the company to someone else.

Do let me know if some of you out there do not agree with my logic.

Avinash Narula

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Comments

Nice writing. You are on my RSS reader now so I can read more from you down the road.

Allen Taylor

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I shall be obliged if you can kindly help me to know from you on SEBI ‘s role on MF & AMC compliance on the following points :-
1. Does any Mutual fund or AMC company in case of any fraud or accounting or redemption mistake within the company and by the company has to inform the same to SEBI or you AMFI , on the loss taken in the particular Fund due to Fraud or if any Error by the company wherein a loss has been taken
2. Does the Fund auditor and AMC auditor has to report the abovesaid kind of transaction of if any fraud or error and the loss borne by the fund or the company,while certifying its Profit and loss statement and the balance sheet. Has the same to be appear in the Auditors report
3.Is the abovesaid kind of eventuality has to be reported by the Board of Director’s and further by the Trustees in their report of either responsibility statement, which either to the unit holders or the to compliance authorities.
4 In case the AMC – MF company says they are not required to report any fraud or accounting and redemption mistake made by the AMC to SEBI, while their Fund Auditors and AMC claims there if no Fraud within the company or on the company, but the AMC has stated the fraud or accounting and redemption mistake made by the AMC, how do they justify the claim – lawfully, within the guidlines or are their claim wrong?

your kind inputs and advise would be highly appreciated

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