Have you reconciled Quarterly Shareholding Pattern vis-à-vis new definition of Encumbrance?

A. Quarterly Shareholding Pattern

The SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) prescribe various periodic filings by listed companies with the stock exchanges where they are listed. One such periodic filing is the Shareholding Pattern of the Company which listed companies file on a quarterly basis under Regulation 31 of SEBI LODR Regulations. 

The format of this disclosure has been specified by SEBI vide its Circular dated 30th November 2015 read with SEBI Circular dated 7th December 2018. As per this format, listed companies are also required to disclose the “number of shares pledged or otherwise encumbered” by the Promoter and Promoter Group entities. Further in this format, a note has been mentioned stating that “The term ‘Encumbrance’ has the same meaning as assigned under regulation 28(3) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.” (“SEBI SAST Regulations”)

B. Amendment in Definition of Encumbrance 

Now, SEBI has, vide an amendment in Regulation 28(3) of SEBI SAST Regulations dated 29th July 2019, enlarged the definition of “encumbrance”. This amendment is effective from 1st October 2019. 

The earlier definition of “encumbrance” included only pledge, lien or any such transaction, by whatever name called. Now, the amended definition includes the following:- 

• any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly;
• pledge, lien, negative lien, non-disposal undertaking;
• any covenant, transaction, condition or arrangement in the nature of encumbrance, by whatever name called, whether executed directly or indirectly.

So, the amended definition of encumbrance is wide enough to cover any restriction on free and marketable title to shares, even cases where shares are locked-in pursuant to any statutory obligation under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR Regulations”), etc. 

C. Disclosure of Encumbrance as on 30th September 2019

SEBI had vide another Circular dated 7th August 2019 asked all promoters of listed companies to disclose specifically detailed reasons for encumbrance if the combined encumbrance by the promoter along with persons acting in concert (“PAC”) with him equals or exceeds 50% of their shareholding in the company or 20% of the total share capital of the company.

In this Circular, SEBI had prescribed that if existing combined encumbrance of promoters of listed companies along with their PAC exceeded the above mentioned thresholds on 30th September 2019, then the disclosure of reasons was to be submitted to stock exchanges by 4th October 2019.

However, such promoters who had locked-in shares, entered into any Non-Disposal Undertaking (NDU) etc., with regard to their shares (which were not covered under the earlier definition of Encumbrance, but now covered under the new enlarged definition of Encumbrance), but their encumbered shares were lesser that the above mentioned thresholds, were not mandated to give any disclosure.

D. Disclosure in Shareholding Pattern

Now since the definition of Encumbrance has been enlarged, while filing the Shareholding pattern for the quarter ended on 30th September 2019, all such cases which were not Encumbrance as per the earlier definition (and hence not disclosed anytime in earlier quarters’ shareholding patterns), but are covered under the new definition must be disclosed in the “Number of shares pledged or otherwise Encumbered” column in the Shareholding pattern for quarter ended 30th September 2019.

E. Need for Reconciliation:-

Generally Registrar and Transfer Agents of Listed companies provide the shareholding pattern to companies as per SEBI prescribed format, and listed companies submit the same to stock exchanges.

So, now listed companies will need to crosscheck whether promoter or promoter group entity had created any Encumbrance on their shares which was not covered in the earlier definition, but covered in new definition of Encumbrance, even if the number of such encumbered shares may be very minimal. If there is any such case, then such number of encumbered shares must be reconciled with the data provided by the Registrar and Share Transfer Agents and accordingly it must be disclosed in the Quarterly Shareholding pattern, even if that data may or may not be provided by the Registrar and Transfer Agents.

There can be many instances where the requirement of disclosure of reasons was not required by 4th Oct 2019 as per above mentioned Circular (as they may be below the said thresholds) but still it must be disclosed in Quarterly Shareholding Pattern, as even if 1 share is encumbered, it must be disclosed as per the format prescribed for Quarterly Shareholding Pattern.

If this exercise of reconciliation is not done and this disclosure is skipped in the Shareholding Pattern disclosure filed for the quarter ended 30th September 2019, then it will amount to non-compliance of Regulation 41 of SEBI LODR Regulations and may trigger show cause notices being issued by stock exchanges and so on….