India's market regulator just found $7 billion dodgy corporate loans

Reuters
Alarmed by the recent Zee episode in which nine mutual funds (MFs) were found to have lent a staggering Rs 7,000 crore to promoters of Zee group and then found themselves unable to liquidate the security of listed shares for fear of being unable to recover their full amounts, SEBI is preparing to bring new regulations that will expressly prohibit MFs from entering into such transactions, according to sources.

Not just that, the market regulator is planning to direct MFs to convert all existing innovative security structures into direct pledge of shares, to give at least some measure of control to the MFs.

Of late, with the use of fancy footwork by promoters and MFs alike, there have been a spate of similar transactions with NDUs (non disposal undertakings), non-encumbrance undertakings and covenants limiting transfer of shares, but all falling short of pledging the shares.

Considering how illusory the security of pledged shares have proven in the Zee episode, Sebi feels all other fancy structures obviously provide no safety at all investors, and these need to be all converted into direct pledge of shares immediately.

This will also ensure full disclosure of the extent of shares pledged, because promoters have been playing hide-and-seek with the disclosure requirement through the use of non-pledge structures.

The MF industry has currently lent over Rs 50,000 crore to promoters of listed companies against their shareholding, and not surprisingly, given this huge magnitude of public funds involved, Sebi is moving double quick to pre-empt imbroglios such as the one involving Zee.
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