Share pledging curb stumps companies, promoters

A seemingly innocuous clause in the new, tighter insider trading regulations that took effect on April 1 is giving Indian companies a hard time in the ongoing earnings season. The Securities and Exchange Board of India (Sebi) has extended the period during which management and promoters aren’t allowed to trade in their company’s shares before earnings announcements. What had gone unnoticed was that the regulator also included share pledging by promoters in this window.

Company promoters looking to raise money by pledging shares have been caught off guard in the current earnings season, said experts.

Earlier, listed companies were required to close the trading window for four days – 48 hours before the board meets for results and 48 hours after their declaration. According to the new rules, trading restrictions for company insiders start from the end of every quarter and are lifted 48 hours after the declaration of results. That could mean an extended period for companies that report late in the season.


“It closes about 200 days for trading and possible fund raising through pledge of shares (leaving aside other corporate action days) every year,” said Ankur Jain, group CEO of Satellite Developers, a real estate firm.

All listed companies are required to specify the period in which the trading window is closed for promoters, directors and employees when they are in possession of unpublished price-sensitive information. The trading window is also applicable to auditors, accountancy firms, law firms, analysts and consultants who are assisting or advising the company. It stays closed during announcements such as financial results, dividends, mergers, takeovers, buybacks, public and rights issues and major expansion plans. Previously, only buying and selling of shares by these individuals or entities constituted insider trading, not pledging.

Most companies announce results within 15-20 days of the end of every quarter and about 45 days of the full year.

“That also restricts about four months for trading and fund raising,” Jain said. “This will have farreaching impact for company promoters and its employees.”

Promoters and companies pledge shares to raise funds, a matter that came to the fore in the wake of the IL&FS default.

Some lawyers said the regulator may not have taken into account the full impact of including share pledging in the restricted period.

“This has resulted in an unintended consequence of the shareholders not being able to pledge shares of the listed company during the intervening trading window closure period,” said Ajai Achuthan, partner, Bharucha & Partners.

Sebi had tightened insider trading rules based on the recommendations of a committee headed by former law secretary TK Viswanathan on fair market conduct.

“With the new rules, compliance has gone up,” said a member of the committee. “There is lot of suspicion that lot of trading takes place during results. Results are fairly critical information. People who are involved in result preparation are privy to unpublished price-sensitive information.”

The tighter rules follow quarterly results of several blue-chip companies being leaked last year on social media platforms such as WhatsApp before official announcements to the stock exchange.

Lawyers said the regulator could ease norms for share pledging.

“Sebi could consider relaxing the trading window closure period norms by permitting pledge of shares with a scheduled commercial bank or systemically important NBFC (nonbanking finance company) or housing finance company or a public financial institution,” said Achuthan.