Thread by @Funter21510910

Today, I will be analysing the SEBI circular on 'disclosure of reasons for encumbrance by promoter of listed
companies'. The circular was issued on 7th Aug and will come into effect from 1st Oct. Thread (1/12)

The circular makes it mandatory for promoter(s) and people acting concert (PAC) to disclose reasons for encumbrances (of shares) if the combined encumbrances increase (a) 50% of promoter shareholding or (b) 20% of total shareholding. (2/12)

For the purpose of calculating encumbrances, not only are the pledge shares being considered but also the indirect encumbrances through lien, negative lien, non-disposal undertaking, covenants, conditions, arrangements etc. 3/12

The circular also mandates the disclosure of the type of entity to which the shares are being encumbered to (NBFC, HFC etc) and the details of capital market instrument used (if any). 4/12

The circular further requires the promoter/ PAC to disclose the security cover of amount borrowed and the end use of borrowings (personal or for the listed entity). 5/12

In my opinion the circular will have the following impact:

A) Enhanced disclosures will improve transparency enabling the analysts to better understand 'promoter risk' and 'resources'. 6/12

B) Hiding the promoter indebtedness - direct or contingent, would be difficult e.g. Yes Bank promoter leverage (contingent pledge structures in promoter entities - Morgan Credit and Yes Capital) would now have to be disclosed. 7/12

C) With so many disclosures to make, fund raising by promoters, using listed shares as security, would become quite cumbersome. Promoters would prefer borrowing by securing other assets viz land, property, unlisted shares etc. 8/12

D) With the expansion of the definition of 'encumbrance' by this circular, many listed companies may shock investors/ analysts with very high levels of revised promoter indebtedness. 9/12

E) SEBI, it seems, is actively discouraging promoter borrowing. Besides the new disclosure requirements, SEBI has virtually closed the Mutual Fund route for promoters by mandating (through Board minutes) a security cover of 4X on borrowing against shares from MFs . 10/12

Some leveraged promoters could soon be seen selling chunky stakes in listed entities to de-leverage. 11/12

F) On the flip side, the new circular bottles the entrepreneurial spirits. Shares of listed companies are a convenient currency to put capital in new businesses. Restrictions on entrepreneurial capital doesn't bode well for the economy. 12/12

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