Unlike a normal agreement, there is a sharing agreement between three parties: the main agreement is between the borrower (usually the entity) and the lender (bank or NBFC). There is a security contract between the credit company and the project promoter. It is only when the borrower accepts the share guarantee contract and sets the terms of issuance that the guarantee agreement enters into force. In principle, when the promoter negotiates a loan from the lender, he does so on behalf of the lender as a representative of the lender, but in his personal quality. Shares are usually mortgaged by the promoter to obtain credits for professional or personal needs. The loan taken out by the equity collateral can be used to meet various requirements such as new acquisitions, working capital requirements, financing of various transactions, conversion of collateral into shares, possible personal obligations or other business needs. As an investor, among the many factors to check before investing in a business, the collateral of stocks is an important consideration. A company with highly mortgaged shares is a concern of shareholders. In its latest Financial Stability Report, the Reserve Bank of India (RBI) recently raised concerns about equity collateral, as it could pose a problem with the assets of small investors, as well as the rise or the case of market scenarios.
In India, of the more than 5,000 publicly traded companies, 4274 companies had pledged all or part of their shares, according to an analysis by the Securities and Exchange Board of India. This was also mentioned in the RBI report on financial stability. Therefore, understanding Share Pledge becomes an important factor. In order to protect the interests of existing shareholders, SEBI has adopted certain provisions. These provisions mainly concern the disclosure obligations of the pawnbroker and the commitments relating to subsecured shares. This occurs because the collateral of shares by project proponents could result in a change of ownership if the developer is unable to repay the loan. The SAST regulations make it clear in Regulation 28 that the burden on the shares would include the collateral of the shares. (iii) that both the lender and the borrower have properly executed the loan agreement and that, when lenders ceasing the shares on the open market, the share price continues to fall. In addition, the sale of shares by lenders on the open market also changes the company`s participation model. In most cases, even promoters lose their share and have no or less the right to vote in the crucial business of the company.
But in the cases mentioned below, banks or financial institutions can take shares in a company as collateral: Regulation 30 deals with the advertising obligations of promoters. In accordance with this regulation, the organizer of each target company must disclose any information regarding the actions or details concerning the referral or release of such charges by him or any person acting with him in the company concerned. Disclosure should be in place within seven business days of creation: Referral or unblocking charges are, as is perhaps the case, to category AD – I Banks can pass on to the resident borrower of the ECB their “objections” about the pawning of the shares of the lender held by project promoters and in the borrower`s national associated companies, in order to guarantee the ECB under the following conditions: Regulation 29 deals with the lender`s advertising obligations. The regulation provides that in the event of the acquisition or sale of shares or voting rights by the purchaser or a concerted person of the target company, which amounts to 5% or more, his right to vote and/or his total interest in that target company are disclosed within 10 working days of the acquisition of those shares or voting rights. Disclosure is made: the shares are traded on the stock exchange and their prices fluctuate very often. As share prices continue to fluctuate, the value of collateral is in constant