These shares were not locked-in shares. The issue is about disclosure. Insiders need to be able to buy or sell their shares as per rules of black out periods etc. but with proper disclosure. Pledging shares should also be included in the list of transactions that require insiders to report the transaction. Please see Prof Jayanth Varma’s post on this matter indicating that current regulations do not cover pledging of shares. http://www.iimahd.ernet.in/~jrvarma/blog/index.cgi/Y2008/Satyam-pledges.html

Promoters can hold stakes that are subject to `lock-in’ upto a minimum prescribed limit for a stipulated period of time (depending upon the age of the company and the recency of its issue) and the listing agreement and SEBI regulations already impose restrictions to the effect that *no lien* can be established on these shares in favor of any third party that are subject to lock-in. Companies Act also prescribes that promoters cannot have any lien on shares subject to lock-in. For shares that are held in excess of the lock-in mandates (treasury/portfolio stock) and that portion of locked-in shares that have already outlived the mandatory period are allowed to be created a lien on, either by way of pledge or collateral. That is permitted since otherwise the principle behind `joint-stock’ ownership of corporations and its various freedoms granted by the statute (company is an artificial person created by law and has a perpetual existence that can outlive its promoters, managements or shareholders as opposed to partnerships where the firm is not an independent entity separate from its partners) would be laid redundant.

Still I would say the spirit of the law is important than its letter and conscientious promoters (oxymoron, perhaps) should declare creation of third party lien on them. But if it is mandated by regulations, it will entice the promoters to invest their surplus funds in stocks of other companies (rendering their own stocks illiquid that flies in the face of liquidity logic behind listed corporations) to take advantage of favorable price movements during bullish phases.

As for insider trading, there are periodical declarations to be made under SEBI’s SAST regulations as and when the promoters or key managerial personnel acquire or divest their company stock. As such if the promoters stock meet with margin calls and are eventually liquidated by lenders, it amounts to divestment and is therefore required to be declared forthwith – even under existing laws.

In India, in fact we need less regulations, lesser bureaucracy. That will attract overseas investments. Why do people route funds thro tax havens, hedge funds and other opaque investment vehicles? Lax laws, liberal tax regimes, least transparency. In times of recession like we have, Governments should create space for investors to free up their funds if the intention is to expand the risk appetite. I don’t buy the argument that intensive legislation will lead to extensive compliance. In fact, it’s the other way round.

I do think that there are places where the regulation and disclosure in India needs to be tightened. One is in shareholder rights. Two is in insider trading.

Independent directors are nominated by the CEO and cannot be considered to be truly independent anywhere. Michael Eisner had the principal of his child’s school on the board of Disney. Which is exactly why shareholders should be able to present a slate of directors and force a shareholder vote.

A promoter pledging his shares and not having to disclose it is an error, an omission in the rules concerning insider trading and should be plugged.

And this is not just in India. US had its much condemned SOX Act and strict Audit regulations despite which excessive leverages got perpetrated over the years and the mortgage crisis happened. And never forgive the institutional investors that were in the majority and remained passive all along (they never asked why Satyam kept so much of liquidity in current accounts, don’t they get annual balance sheets, why didn
t they ask for larger payout of dividends?) and wake up one day to realize that management is wiping out the treasury of $1.6 billion!

They pay for their sloth! They are not puritans either…