20 February, 2020
3 Min Read
Syllabus subtopic: Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth.
Prelims and Mains focus: about the move; benefits and significance; about share pledging
News: The Securities and Exchange Board of India (SEBI) has amended the SEBI (Depositories and Participants) Regulations by including an additional explanation that states that ‘pledge’ would also refer to ‘re-pledge of securities for margin or settlement obligations.’
A minor tweak in the manner ‘pledge’ is defined in the regulatory laws is expected to go a long way in minimising instances where stock brokers misuse client securities by pledging such shares for their own benefit in terms of meeting their margin requirements.
The latest SEBI move comes close on the heels of the regulator developing an in-house system to track the movement of client securities that are collected as collateral by the brokers.
What is a pledged share?
Simply put, it is taking loan against the shares one holds. It can be done by both investors and promoters.
Why do promoters pledge shares?
One of the methods promoters use to raise finance is to take loans against their holding in their company from banks or non-banking financial companies. For these financial institutions, these shares are collateral. Promoters can raise funds for various reasons-for meeting requirements of the business or personal needs.
Can banks sell the shares pledged by promoters?
What is the risk for retail investors in this?
High promoter pledged shares can wreak havoc in a stock if price continues to fall and lenders sell these shares in the market. The sudden supply of shares can lead to further price fall and is a risk for retail investors who may have to sell the shares for a significant loss.
What should be the approach of retail investors in stocks with high pledged promoter holding?
Source: The Hindu
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