Regulators' movement to set strict standards in respect of mortgaged shares by promoters

Mumbai, Ta. October 16, 2019, Wednesday

Regulators are getting ready to scrutinize stocks put up by promoters for fundraising and are also reviewing guidelines on this. The move has been made in view of the risks posed by excessive leveraging. It is also proposed by the promoters to tighten the norms for mortgaging stocks.

The Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India and the Pension Fund Regulatory and Development Authority are closely reviewing the regulatory framework.

Regulatory bodies will investigate the final use of funds raised through the pledging of shares, the amount of leverage by companies and the exposure of mutual funds.

Promoters pledge their own stocks to raise the funds needed for new business, but there have been some cases where this money has been used to increase the promoter's stake. In some cases this money has also been used to mislead the share price.

Promoters who have scrapped money have no hesitation in losing control of the company. Because of this, lenders get stuck. The interest of the minority shareholders is at stake when the prices of the promoter stocks begin to fall, ”said one analyst.

In many recent cases, the price of stocks promoted by the promoters was significantly reduced. As share prices fall, lenders are forced to acquire more shares from the promoters, which is becoming difficult to obtain.