Shares pledges by Satyam promoters

The farce at Satyam Computers gets worse and worse with the company announcing that “The promoters informed Satyam that all their shares in the company were pledged with institutional lenders, and that some lenders may exercise or may have exercised their option to liquidate shares at their discretion to cover margin calls.”. This bizarre announcement highlights a deficiency in the disclosure requirements in India regarding transactions by directors and other insiders.

In the United Kingdom, earlier this month, David Ross resigned from the boards of all four public companies of which he was a director after admitting his “unintentional” failure to disclose that he had pledged his stake in one of the companies (Carphone Warehouse) as collateral for personal loans. The model code on insider trading in the UK listing rules states that “dealing” in shares includes “using as security, or otherwise granting a charge, lien or other encumbrance over the securities of the company;”. Thus pledge of shares is subject to the same disclosure requirements as other dealings in shares. Interestingly, at the time when Ross resigned from the boards, none of his personal loans were in default – the situation in the Satyam case appears to be much worse.

In the US, Regulation S-K Item 403(b) was amended in 2007 to provide that while disclosing their beneficial interest in the shares of the company, directors must also “indicate, by footnote or otherwise, the amount of shares that are pledged as security.”

In India, the Prohibition of Insider Trading Regulations do not to the best of my knowledge deal with pledge of shares. In the Substantial Acquisition of Shares and Takeover Regulations, a pledgee of shares is regarded as an acquirer of shares, but banks and financial institutions are exempt from this clause. In any case, even these regulations do not say that the pledger is regarded as a seller.

Posted at 11:43 am IST on Tue, 30 Dec 2008         permanent link

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