Pledge of shares in an IPO: Whose skin is it anyway?

It is common practice for listed and unlisted companies to borrow money from banks and other financial institutions to fund their ventures. Banks and financial institutions, which usually deploy public funds, would typically require promoters’ assets to be used as collateral for raising such funds, in the form of a pledge.

Problems may arise with existing lending arrangements of unlisted companies which intend to go public by way of an initial public offering. India does not have a single financial regulator and accordingly, while the lending transactions are regulated by the Reserve Bank of India (RBI), the listing of securities is primarily regulated by the Securities and Exchange Board of India (SEBI). Thus, there is an interplay of various regulations prescribed by SEBI and the RBI.

Regulations issued by SEBI are geared towards investor protection and SEBI requires the promoters of a company going public to retain a minimum portion of the post issue capital of the company for a certain period of time. In a public issue, shares held by promoters constituting the “minimum promoter’s contribution” (MPC) are required to be locked in for three years and shares in excess of the MPC are required to be locked in for one year, in terms of regulation 36 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations). Further, regulation 33(1)(d) provides that securities pledged with creditors are ineligible for the computation of MPC.

Jeet Sen Gupta is a partner, Yogesh Chande is an associate partner and Nitin Gupta is an associate manager at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.