Sebi asks banks to dematerialise pledged shares

The Securities and Exchange Board of India (Sebi) has asked all banks to dematerialise shares pledged with them as collateral to prevent fraud.

The equity market regulator's advice came in the wake of detection of fraud by some listed companies, banking sources said.

Sebi has brought to the notice of the Indian Banks' Association (IBA) that some listed entities obtained duplicate shares, dematerialised them and sold them in the secondary market when the original shares in physical form were still lying with banks pledged as collateral.

Banks seek shares and other securities from borrowers against loans disbursed as collateral, to be encashed in the event of default.

The IBA, in a circular, has asked all its member banks to take necessary steps to comply with the Sebi request.

Sebi has said the banks need to convert all their equity/debt holdings into dematerialised form to avoid recurrence of fraud. But market participants feel that this move is not enough to counter fraud, as dematerialised shares do not carry a unique identification number. The lack of a unique identity for shares held in the electronic form provided room for deceit, they said.

Banking sources said the companies under scrutiny must be ones that were involved in defaults and whose loans had turned non-performing.

Loans for which promoters have pledged their shareholdings as collateral would account for about 20 per cent of the total outstanding advances of banks, they said.

The loans to medium and large companies, outstanding at the end of March 2005, stood at Rs 2,90,186 crore. The figure has not changed much in 2005-06 as some banks, including State Bank of India, have actually witnessed a fall in lending to this segment of borrowers.

The total non-food credit on March 3, 2006 amounted to Rs 13,78,436 crore.