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Co-ordination amongst company’s internal departments: A Necessity - MMJC
The synonymous usage of the terms `Pledge’ and ‘Encumbrance’ while recent reporting on Adani-Ambuja-ACC funding deal led to an obscure narrative followed by a disruption on the bourses in these stocks.
This was due to one source stating Adani entering NDU (non-disposal undertakings) with lenders for shares of Ambuja, ACC whereas another source stated Adani pledging entire Ambuja, ACC stake to fund the deal.
In this case, borrowing probably did not happen by giving shares as collateral security, but it happened on assurance that the promoter shall continue holding the shares and not dispose it off, hence not amounting to pledge. Despite precision in definitions as specified in SEBI Takeover Code, the words ‘pledged’ and ‘encumbered’ have been parallelly used. Due to this miscommunication, share prices of Adani tanked and swiped of investor wealth from the bourses. The markets would have however reacted differently if media and investors would have been educated properly about the transactions.
In recent times, we have witnessed promoters of India Inc forming complex structures or entering challenging arrangements with lenders that had potential to give-up or lose control over the company without disclosing appropriately to the investors. This was documented in June 2019 Reserve Bank of India’s Financial Stability Report that observed increased promoter activities in this context. Such activities raise red flags about company’s financial health and denotes the risk factor involved in pledging activity that can hinder the company’s growth.
To monitor such dealings, India’s capital markets regulator – SEBI widened the definition of encumbrance to substantially include the entire periphery of such transactions under its purview. This was a watershed moment in the history; SEBI specifically stated all NDUs by promoters will be under the ambit of ‘encumbrances’ in Takeover Code and hence shall require disclosure. They will also include undertakings that restrict promoters’ rights on shares clearly depicting the inclusive nature of transactions that are covered under the definition of encumbrance.
The enlarging and comprehensiveness of definitions began after unprecedented events in case of NDTV, Yes Bank and Satyam, where they circumvented disclosures to Indian stock exchanges.
The case of NDTV (New Delhi Television Limited) relates to loan of more than ₹300 crore taken by promoters from VCPL (Vishvapradhan Commercial Pvt Ltd) to repay a loan taken from ICICI Bank. SEBI in its order held that the loan agreement was a facade in the form of a loan transaction and was executed to shroud the true nature of the transaction which was acquire indirect control of NDTV. However, Securities appellate tribunal set aside SEBI’s order stating the same was in commercial nature and the combined reading of the agreements does not lead to a conclusion of VCPL acquiring indirect control over NDTV.
Another scenario was that of Yes bank where concerns were raised regarding the failure of non-disclosure of encumbrances by the promoter entities. The Satyam scandal surfaced wherein shares were pledged to financial institutions without the knowledge of the shareholders.
Citing lack of shareholder awareness and non-compliance, the requirement to disclose the details regarding pledging of shares by promoters were introduced in SEBI Takeover Code. The message was clear to ensure that no circumventing disclosure irrespective of arrangement entered and the company’s internal departments are expected to co-ordinate and ensure that it is disclosed via undiscriminated platforms within timelines.
However, speaking in context of Adani group, the authority and decision making completely vested with them and there was no giving up stake or losing control in any manner. But certainly, the facts got masqueraded leading to stock markets reacting otherwise. When the owner himself is the face of the company despite entering challenging arrangements and is not losing control or giving up stake in any manner, it assures the lender and other stakeholders that their money is in safe hands.
Hence for the above message to be disseminated correctly, there is a need for proper exchange of facts and communication within different departments in an organization. The corporate compliance department, investor relations and communications department should work actively and in close co-ordination with each other for such transactions to avoid such issues and ensure there is no confusion in information being passed on to the public at large. This can be achieved by prompt disclosures in sync with above departments that can help investors to make an informed decision about whether to invest or not in company. Further, if disclosure made without any whitewash, it shall facilitate efficient functioning of stock markets thus fulfilling SEBI’s goal to protect investors from facing profound consequences and erosion in value of shares.
The Article is written by the Partner of MMJC – Makarand Joshi – and published in ET CFO. The link is as follows: