InvestorQ : Is it correct to say that SEBI has made it tough for promoters to pledge shares to raise money? How will this benefit investors?
Sam Eswaran made post

Is it correct to say that SEBI has made it tough for promoters to pledge shares to raise money? How will this benefit investors?

Answer
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swati Bakhda answered.
1 year ago


In a way, the decisions taken at the recent SEBI Board meeting will make it a lot tougher for promoters of Indian companies to easily raise funds against pledge of their shares. Mutual funds that were funding promoters via the share pledge route are now going to find it very difficult and actually they will find it difficult to fund these promoters. You must recollect this problem when it happened in the case of HDFC, Birla and Kotak FMPs.

The new rules stipulate that mutual funds who accept promoter shares as collateral will have to collect shares up to 4 times the value of the investment. For example, in the case of Essel Group, the funds would be able to invest only Rs.100 crore against Rs.400 crore of shares. In the FMPs, the investment was actually made with a margin of 1.3 to 1.5 as against the 4 times that is required now. That is going to make pledging really unattractive for promoters to raise funds.

Secondly, SEBI has expanded the definition of pledge to include all kinds of encumbrances so any innovative structures will not work now. In addition, any pledge of more than 50% of promoter stake will need to be explained to the exchange and it will be a public document leading to loss of confidentiality. Promoters may not be too interested in borrowing with such restrictions. Mutual funds investors will actually be safer this way!