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. (i) the underlying ECB maturity is applicable to the duration of the share collateral (ii) the transfer of shares if the collateral is claimed, in accordance with the current IG policy. On the other hand, the written execution of a share guarantee contract involves the seizure of shares for those who do not have shares. (ii) there is a clause in the loan agreement; which requires the creation of commissions for the financial security against which the loan is taken out by the AD borrower – I Banks cannot make the ECB`s resident borrower “no objection” to the pawning of the lending company`s shares held by project promoters and in the borrower`s associated national companies, in order to guarantee the ECB under the following conditions: (iii) the lender and the borrower have properly executed the loan; and 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. Stocks are traded on the stock exchange and their prices fluctuate very often. As share prices continue to fluctuate, the value of collateral is constantly changing. If stock prices fall, the value of collateral will also decrease. To repair the eroded value, the developer must either mortgage more shares, provide additional money, or put more assets as collateral. If the promoters are unable to recover the eroded value of the security, the lender may sell the shares on the open market in order to recover its money. The minimum value of the guarantee is agreed between the lender and the borrower.
If the value of the shares is less than the minimum value, the lender can also sell the mortgaged shares and get the money back. In the worst case scenario, the promoter could also lose all of its stake in the business. With respect to financing, credit institutions and financial institutions, i.e. banks, require that the party seeking the use of the loan acquire several securities. In these financing transactions, banks require individuals or capital companies who apply for credit from the bank to sign bonds, mortgage contracts, transfer contracts as securities, as well as credit/credit facility contracts. As a general rule, where the party receiving the loan is a limited company, the banks also require the debt company to mortgage its shares in favour of the bank against the loan requested. For companies acting as deposit companies, the provisions relating to the collateral of personal property are applied in accordance with Article 939 TCL. As a result, the seizure of the shares of the limited companies is established in accordance with 954 TCL on the rights of shareholders.