The Securities and Exchange Board of India (Sebi) is questioning Centurion Bank's action in creating a pledge on locked-in shares in the Pentamedia preferential allotment case.
According to sources it has to verify whether the bank has violated the lock-in norms in creating a pledge on shares which were under a lock-in for one year.
Centurion Bank officials, however, maintain that there has been no violation so far as they are concerned.
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A senior official in the bank pointed out, "the lock-in means that they are not to be sold. Transfer of shares have not taken place and it was only a pledge."
Under the terms of agreement of the preferential allotment the shares are not to be sold, hypothecated or transferred till January 30, 2002.
The lock-in rule has been interpreted differently by the parties.
Centurion Bank has taken it to mean that the shares cannot be sold. But the terms of the allotment clearly specify a bar on hypothecation of the shares - which would also mean a pledge of shares to make up a shortfall in value of securities already pledged with the bank.
Sebi, however, feels that it applies to any financial transaction. According to the bank, since Nikko's is the beneficiary account, they were perfectly justified in creating the pledge.
"We knew that there was a lock-in and we also checked up with National Securities Depository Ltd (NSDL)," the official clarified, but the bank has however no official letter from the depository to back its claims.
Sebi is rather unclear about the entire matter and is still in the process of sifting through available evidence in order to ascertain whether any of the parties concerned have violated the lock-in guidelines.
Sources said, "there was a lock-in on the shares. In the circumstances we have to find out whether the bank violated the guidelines in creating a pledge on the shares." It is clear that no sale of the share have taken place. Sebi, after sifting through the evidence has ascertained that there were no transfer of shares after allotment. The only point to be verified is with regard to the pledge.
Another point which the securities watchdog is working on is the issue of safe custodian. Malu Financial Securities, the original allottees of the shares, had in a letter to the Bombay Stock Exchange, said the shares were lodged with Nikko, which was their safe custodian.
Incidentally Nikko is not a registered custodian with Sebi. The net worth requirement for a safe custodian is Rs 50 crore within five years of establishment.
Sebi itself feels that lodging the shares with Nikko was a private arrangement between the two parties. However there is very little that Sebi can do in this regard.
Sebi is also taking up with depositories the issue of disabling creation of a pledge with respect to lock-in shares.
According to Sebi, "as regards the pledge of preferential shares under lock-in as of date there appears to be no system available with the depositories to disable creation of pledge. We are taking up with the depositories in this regard."