India Inc's promoters may find the going tough on pledging shares and converting warrants if stock market regulator Securities and Exchange Board of India accepts the primary capital market advisory committee's recommendations.

The suggestions, made at a meeting today, will be considered by the Sebi board shortly.

The committee said that promoters will have to make mandatory disclosures when they raise finances by pledging their shares. This is because lenders ask promoters to pay additional margins when the value of the shares pledged as collateral falls. Lenders sell these shares in the market if promoters fail to pay margins --a common trend in a rapidly falling market. This can have a cascading impact on the stock price, the committee observed.

A source close to the committee said when promoters pledge their shares, they generally pledge their voting rights. "Investors have a right to know whether the owners of the company continue to remain owners," the source said, adding this is the only way to protect the interests of minority shareholders.

Market players, however, said such a disclosure in today's market may lead to selling pressure in the shares of companies where promoters have pledged shares.

Promoters of at least 150 companies are understood to have raised funds by pledging their shares, the most prominent being former Satyam [Get Quote] Chairman Ramalinga Raju who pledged his entire stake to lenders, who dumped the shares in the market when Raju failed to pay margins.

Aditya Narain, MD and Head, India Research at Citi Global Markets India, said the highly leveraged positions of promoters and companies are becoming risk factors for the market, especially in cases where such information is not available in the public domain.

On warrants, the Sebi committee said promoters issuing optionally convertible warrants will have to pay a higher margin of 25 per cent from 10 per cent now. Under such schemes, promoters issue warrants to themselves with a provision that they will be converted into equity after 18 months at a pre-determined price. Failure to do so will mean forfeiting the margin.

This suits promoters in a rising market because they can convert the warrants into equity at the old price even though share prices have risen. But the problems start in a falling market since promoters are disinclined to go in for warrants conversion at the old price and prefer forfeiture of the 10 per cent margin.

The Sebi committee wants to make such forfeiture costlier by increasing the margin to 25 per cent.