The FSA has begun a probe into transactions made by Rakesh Kapoor, boss of household goods giant Reckitt Benckiser, that may have breached stock market rules. It is thought that he pledged shares worth around £8.7m as collateral for a personal loan with Bank of America Merrill Lynch. Under very strict City regulations, companies must inform the market if shares have been used as security for loans.
Reckitt is one of the largest public companies in the UK, producing household products from Cillit Bang to Vanish to Nurofen, and said that the circumstances of the loan had come to light after an internal review. The implications of such a loan arrangement can be damaging to a company because of the possible effect on the chief executive’s behaviour. With borrowing that nobody knows about, Kapoor may have felt the temptation to keep hidden any news that may send the share price down and therefore precipitate loan repayments. Publicly disclosed loans mean the CEO has less personal motive to conceal bad news.
The issue of using shares as undisclosed loan collateral got a lot of attention back in 2008 when the co-founder of Carphone Warehouse, David Ross, used shares worth over £200m as collateral on a loan. Around that time, it emerged that scores of big-cheeses in the City had made similar arrangements after the FSA cleared up some ambiguity in the rules governing the practice.
Some suspect that Kapoor will probably get off the hook with this one, because he was a senior executive and not a director when he took out the loan in 2010. The company secretariat should therefore arguably have been the one to let the market know what the deal was. Nonetheless, critics point to the firm’s recent track record in compliance blunders, including a £10m fine for overcharging the NHS for heartburn tablets, and a £20m fine in Germany for some price-fixing activity surrounding dishwasher tablets. Forgetting to tell the market about an incoming CEOs existing loan arrangements when there is a regulatory requirement to do so does not look good.
Shares were down around 0.9% to 3612p around midday. Watch this space and MT will keep you updated on whether shareholders are right to be worried…