By LYNETTE KHOO

When it comes to pledged shares and margin loans, disclosure rules that require directors to make a judgment call are inadequate, the CFA Institute Centre for Financial Market Integrity said.

In a paper released yesterday, the CFA Institute Centre urged for higher disclosure standards in this area across Asia-Pacific stock exchanges.

Directors are the ones tasked with deciding whether a piece of information is price-sensitive and whether to disclose via an announcement to the relevant stock exchange.

But information on pledged shares can become price-sensitive when the share price approaches the trigger point at which lenders can exercise their right to sell the pledged shares to meet margin calls. This can result in further sell-down by other investors, the CFA Institute Centre said.

It noted that the practice of pledged shares tends to be more prevalent in small and mid-cap companies, where the founders and senior executives typically hold large stakes and free float is limited.

At Singapore-listed Sino-Environment, for instance, chairman and chief executive Sun Jiangrong lost his entire 56 per cent stake when his pledged shares were force-sold upon a loan default. His loss of control triggered an early redemption of $149 million in convertible bonds, which the group defaulted on.

Bigger firms such as India's fraud-hit Satyam Computer and the now-insolvent ABC Learning Centres in Australia were also cited in the report as having had problems relating to pledged shares.

The CFA Institute Centre's review of existing regulations in Asia-Pacific found that disclosure requirements on pledged shares vary across different jurisdictions.

Hong Kong stock exchange requires disclosure of pledged shares by controlling shareholders holding at least 30 per cent and upon loan default.

In other cases, there is no specific regulation on such disclosure though companies are required to disclose information deemed as material and price-sensitive, as in the case of Australia and Singapore.

But Sharon Craggs, board member and advocacy chair of CFA Singapore, noted that it is gratifying to see that jurisdictions are implementing changes.

In Singapore, the stock exchange has proposed to make it mandatory for controlling shareholders - who own at least 15 per cent of total issued shares - to disclose pledged shares.

In India, the rule was amended in February, requiring event-based disclosure at the time of pledge and quarterly updates, after investors of Satyam saw their stock value erode when some shares pledged by promoters - directly or indirectly in control of the company - were force-sold.

'We advocate that jurisdictions across the Asia-Pacific region improve their disclosure requirements in the best interests of investors,' said Lee Kha Loon, head for Asia Pacific at the CFA Institute Centre. 'We believe in disclosure of critical information that leads to protection of investors.'

The CFA Institute Centre recommended that there should be specific regulations for controlling shareholders and directors to disclose details of shares pledged on an event basis.

There should also be disclosure of shares owned by directors and controlling shareholders and the percentage of these owned shares to the total issued capital.

This article was first published in The Business Times.