Citizens' Issues
CIC directs RBI to disclose details of penalties imposed on banks

The CIC said that since significant amount of public funds are kept in banks and therefore, the public has the right to know how these banks are functioning

In another victory for RTI activists, the Central Information Commission has directed the Reserve Bank of India (RBI) to disclose names of banks which have been penalised or served show-cause notices for violation of laws. The central bank has tried to stonewall such information in the name of protecting fiduciary and commercial interests earlier too; but the CIC has pulled up the apex bank once again.

While hearing an appeal from Subhash Chandra Agrawal, Shailesh Gandhi at CIC ruled that citizens have the right to know what the banks are doing and where they have kept their money. Drawing from its earlier ruling regarding disclosing information about defaulting cooperative banks (read CIC to RBI: Reveal inspection reports of cooperative banks), the CIC said, “The PIO is directed to provide the complete information to the appellant before 15 December 2011 after severing details of customer-related information and particulars of informers/ whistle blowers/ source of information.”
 
The PIO had earlier refused to divulge details of banks served show-cause notice by the RBI, saying that it will “prejudicially affect the economic interests of the state and harm the bank’s competitive position. The SCNs/findings/reports/associated correspondences/orders are therefore exempt from disclosure.” However, Mr Agrawal went for appeals, which upheld the CPIO’s denial. Dissatisfied, Mr Agrawal approached the CIC. Mr Gandhi dismissed the apex bank’s reasoning that the information would harm the nation’s economic or any other interests.

Criticising RBI’s logic, Mr Gandhi said, “This appears to go against the basic tenets of democracy and transparency. The information sought pertains to imposition of fines by RBI on certain banks for violation of rules including documents, correspondence, file notings, etc, list of banks which were issued show-cause notices before imposition of fine along with the type of default, and list of those banks on which fine was ultimately not imposed along with details. This bench is unable to understand how disclosing this information would affect the economic interests of the Indian nation. Financial stability of a nation cannot lie solely on public confidence in banks/financial institutions, and certainly not where banks/financial institutions holding public funds are involved in irregularities. The submissions of the respondent appear to suggest that the economic state of this nation is extremely fragile and therefore, the information sought should not be disclosed.”

The CIC said that since significant amount of public funds are kept in banks and therefore, the public has the right to know how these banks are functioning. “I believe it will only help to improve the fundamental strength of the economic foundations of the country and safeguard against sudden disruptions,” observed Mr Gandhi.

Analysing a high court precedent which had upheld the RTI against other interests, Mr Gandhi also pointed out the irregularities present in Banking Regulation Act, 1949. He said, “Section 35 appears to impose restrictions on access to information held by or under the control of RBI in as much as the inspection reports shall be provided only to the banking company, or can be published only by the central government after notifying the banking company. This is prima facie inconsistent with the RTI Act, which mandates disclosure of information unless exempted under Sections 8 and 9 of the RTI Act. Therefore, in accordance with Section 22 of the RTI Act, the provisions of the RTI Act shall override the provisions.”

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About 31% listed companies expose investors to volatility due to share pledging by promoters

Pledging shares against debt is a sure recipe for disaster, especially in a falling market. Around 31% companies out of 1,214 listed ones have actually pledged shares of more than 50% of their paid-up capital

In the backdrop of inadequate disclosure levels on share pledging, investment in such companies exposes an investor to severe price volatility, in case a promoter is not able to meet payments, or provide additional collaterals in a falling market, said a research agency. According to a report by Crisil Research, promoters of 31% of the 1,214 listed companies and with a market capitalisation of Rs100 crore or more, have pledged substantial portion of their shareholding. The total pledge works out to Rs1.1 lakh crore worth of market capitalisation as on 18 November 2011.

Promoters have pledged substantial portion of the shares in several popular companies. Such companies include Gujarat Pipavav (in which promoters have 100% of their holding), Tata Coffee (100%), Ansal Properties (97.74%), Koutons (97.03%), GTL (96.38%), Dunlop (91.89%), Kingfisher (90.93%), Gati (89.83%), United Spirits (89.64%), Gujarat NRE Coke (88.35%), JSL Stainless (87.69%), Spice Jet (86.16%), Essar Oil (83.99%), Bilcare (83.05%), S Kumars (83.03%), Omaxe (81.61%), Era Infra (80.9%), Orchid Chemicals (77.14%), McDowell Holdings (74.14%), Parsvanath (71.24%), KS Oils (70.28%) and Suzlon Energy (69.41%).

“In 2011, the capital markets have been highly volatile due to looming concerns of high domestic inflation, rising interest rates and tepid global economic environment. These concerns have triggered a fall in stock prices, creating pressure on the promoters who have pledged shares to make good the loss in the value of the collateral. Investors, especially retail investors, are generally oblivious of such details, and eventually incur losses because of sharp fall in prices,” said Mukesh Agarwal, senior director, Crisil Research.

The equity markets have been under phenomenal pressure. Stocks across the board have been shivering under selling pressure amidst of gloomy market scenario. While the markets are under pressure, the companies in which the promoters have pledged substantial portion of their shares will come under tremendous pressure, as there is a risk of margins calls getting triggered from the lenders.

Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities said, “Leverage is like fire. If you know how to handle it, you can cook food. If you do not know how to handle, you can burn your fingers. The promoters of mid-cap and small-cap companies will need to find the solution to this problem very quickly, before things move out of hand.”

While the motive for pledging shares is very difficult to ascertain, promoters of larger corporates may able to withstand the margin pressures associated with pledged shares. Tarun Bhatia, director, Capital Markets, said, “Other than the Securities and Exchange Board of India’s (SEBI) current guideline, which require companies to disclose percentage of promoter holdings pledged, there are no regulations that make it mandatory for promoters to disclose other crucial details like purpose of funds raised through pledging of shares, price at which the initial pledging is made and the conditions under which the margin call will be triggered.”

 
Crisil Research said it believes that the critical information on promoter share pledging other than the percentage holding should be made available on a quarterly basis to provide greater transparency and information to investors. “The information provided should include purpose of fund raising, amount of funds raised through shares pledged, entity with which the shares are pledged, stock prices and the conditions when the margin calls will be triggered,” added Mr Bhatia.

The concept of pledging of shares by promoters is not new to India but it caught the attention of regulators and investors only after the Satyam debacle (now, Mahindra Satyam). Promoters, in order to raise funds for either personal or company needs, pledge their holding shares to any financial institution. Non-banking financial companies (NBFCs) are more active than banks in providing such loans.

In developed countries like the US, not just promoters but directors too are required to disclose their pledged shares. In UK, this is covered under insider trading regulation. But in India, until recently when SEBI made it compulsory for promoters to disclose their pledged shares, there were no disclosure norms. However, post-Satyam debacle, SEBI in January 2009 made it mandatory for promoters and promoter groups to disclose the details of pledging of shares of their listed entities. Under this guideline, apart from disclosing whenever shares are pledged, promoters are also expected to disclose it periodically. Respective stock exchanges are to be informed about the details of share pledging.

In today’s market conditions, with the Sensex slipping, promoters do not have the cash to meet margin calls. When the pledged shares are sold in a weak market, the share price falls further. Apart from this, promoters always have the risk of a hostile takeover.

Crisil Research’s analysis also reveals that of the listed companies, which have reported pledging, in 183 companies, 25% or more of promoter holding is pledged; this includes 107 companies with 50%+ of promoter’s holding being pledged. In as many as 14 companies, promoters have pledged 90%+ plus of their holding, thereby exposing the companies to the risk of losing promoter control and also higher share price volatility if the prices fall from their current levels. Sector-wise, power generation, IT and ITeS, infrastructure, and pharma and healthcare companies have seen higher levels of pledging.

 

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COMMENTS

Bhalachandra Singde

5 years ago

You might have known the report of the director of Parshvanath Construction in which he says that the Bank has not given any funds against the promoters' shares pledged to them, but it is collateral only. He said that he has purchased couple of million shares recently. Sometimes the media/brokers do'nt go to the route of the problem and pass on their comments to embarrass the real investors.

arun adalja

5 years ago

do we have any regulation for pledgeing the shares by promoters?any limit?any provision in companies law?if not then anything can happen and we must have some restrictions by law to prevent this thing.

Capt S M Divekar

5 years ago

VERY GOOD ARTICLE. Shri Renuka Sugar shareholders also affected. Any hope for them?

B S SINGDE

5 years ago

The Banks generally take the personal bond and/or perssonal properties such as landed property etc. in case of private businesses as collateral security and in the case of companies, they may ask the promoters/directors to pledge their shares as collateral for the loans and other facilities granted to company against the liquid and real assets. So it has to be ascertained whether the pledged shares of promoters are taken as collateral or otherwise. I do not think that Banks will grant loans for personal use or for reinvesting in their other projects against shares to the promoters. This needs to be highlighted.

Food inflation falls to 9.01% for week ended 12 Nov

The fall in inflation came even as prices of most agricultural items, barring potatoes, onions and wheat, continued to rise on an annual basis

New Delhi: Food inflation fell sharply to single digit at 9.01% for the week ended 12th November from 10.63% in the previous week. The fall in inflation came even as prices of most agricultural items, barring potatoes, onions and wheat, continued to rise on an annual basis, reports PTI.

Food inflation, as measured by the Wholesale Price Index (WPI), stood at 11.38% in the corresponding week of the previous year.

According to the data released by the government today, onions became cheaper by 32.85% year-on-year, while potato prices were down by 7.23%. Price of wheat also fell by 3.09%.

However, all other food items became expensive on an annual basis during the week under review.

Vegetables became 17.66% costlier while pulses grew dearer by 14.28%, milk by 10.46% and eggs, meat and fish by 11.98%.

Fruits also became 4.59% more expensive on an annual basis, while cereal prices were up 2.86%.

Inflation in the overall primary articles category stood at 9.08% during the week ended 12th November against 10.39% in the previous week. Primary articles have over 20% weight in the WPI.

Inflation in non-food articles, including fibres, oilseeds and minerals, was recorded at 4.05% during the week under review, as against 5.33% in the week ended 5th November.

Fuel and power inflation stood at 15.49% in the reporting week, the same as in the previous week.

The decline in the rate of rise in food prices is likely to bring some relief to the government and the Reserve Bank of India (RBI), which have been facing flak from all quarters for persisting high prices.

The government had said steps were being taken to remove supply bottlenecks and expected prices to ease from December.

Yesterday, finance minister Pranab Mukherjee had said that the government’s immediate priority is to contain price rise.

“High inflation and also some of the effort to control liquidity has a detrimental effect on short-run growth. The immediate priority is to control inflation so that long-term growth prospects are not affected,” Mr Mukherjee had said in a written reply in Rajya Sabha on Wednesday.

Earlier this week, he had said in Parliament that inflation is likely to moderate to around 6%-7% by March 2012.

Headline inflation, which also factors in manufactured items, has been above the 9% mark since December 2010. It stood at 9.73% in October this year.

The RBI has hiked interest rates 13 times since March 2010 to tame demand and curb inflation.

In its second quarterly review of the monetary policy last month, the central bank had said it expected inflation to remain elevated till December on account of the demand-supply mismatch, before moderating to 7% by March 2012.

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