Disclosure of Promoters' Loan Against Shares

In the wake of the corporate scandal at Satyam, one of the regulatory changes proposed by the Indian securities regulator, Securities Exchange Board of India is to make the information on the pledges of the promoter holdings of listed companies public.
This is, in itself, a laudable measure. The non-promoter shareholders have a right to know the actual net wealth that the promoter has left in the listed entity after deducting the borrowings. In the long run, this rule will make Indian market more efficient than other emerging markets.
However, in the short-run, this rule may have devastating effect on some of the companies and their management. In the UK, FSA has similar rule for making public the pledges of promoter shareholding. Carphone Warehouse, the British mobile phone retailer, can be considered as an interesting case study for the effect of non-adherence of the rules on disclosure of the pledging of promoter shareholding.
On 8th Dec 2008, the company announced that its co-founder, David Ross, had pledged a substantial part of his shareholding in the company without informing the shareholders, and more importantly, none of the loans are in default. Also the company announced that he does not intend to sell his shares. Mr. Ross resigned from the board on the same day.
Within hours of this announcement, which apparently has no long-term impact on the business of the company, the stock price fell, leading to a 10% underperformance of the stock, compared to FTSE100. Clearly the stock market does not like promoters pledging their holdings without informing shareholders.
Given that, in India, there is absolute secrecy about the promoter pledging; the publication of this information is going to create huge ripples in the market. Corporate raiders may use this information to drive down the value of shares significantly, in order to trigger a sale by the lenders to the promoter. Even when there is no corporate raider in sight, non-promoter shareholders will exit the company where promoters have pledged a large proportion of their holding, fearing such corporate raiders in future.
Am I opposing SEBI for enforcing this measure? No. Don’t get me wrong. I am just bringing out one of the possible outcomes, and however unpleasant this outcome seems, the long-term benefits of this announcement exceeds any short-term dislocation.
In the long-run, this measure will restrain, to a large extent, promoters’ interest in manipulating the stock price, as they will not be able to use the market value of their holdings as ATM, just like subprime borrowers in USA were using the rising value of their houses as ATM through home equity loans.