Sagar Gupta

Sagar GuptaCorporate Action is gaining more and more importance nowadays. Competition has prevailed over this too. To understand, Corporate action is a process by which a company gives benefits to the investors who are holding securities of the company. Benefit can be in form of cash or non cash benefits. Cash benefits include Interest/Dividends and Non Cash Benefits include Bonus Shares, Right Shares etc.

A large number of shares distributed among a large number of shareholders is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices. The larger the number of shares and the number of shareholders, i.e., the larger the public float, the less is the scope for price manipulation. For example, if the promoters are entitled to, say, 90% of the stock, it may result in concentration of shareholding upto 90% in the hands of a select few and the consequent shrinkage of floating stocks in the secondary securities market. Given the imperfections inherent in the securities market, this could make the security susceptible to price manipulation to the prejudice of the interests of the investing public and defeat the prime objective of the The Securities Contracts (Regulation) Act, 1956 (SCRA)  of preventing undesirable transactions in securities. Moreover, the larger the public float, the more effective is the instrument of listing as a tool for redistribution of wealth in the country.

 Prior to September 1993, Rule 19 (2) (b) of the Securities Contract Regulation Rules, 1957 (SCRR) required a minimum public offer of 60% of the issued capital of a company for getting listed on a recognized stock exchange. The securities taken or agreed to be taken by the Governments or select financial institutions, up to a maximum of 11%, could form part of 60% of the public offer. It empowered the stock exchanges to relax this requirement, with the previous approval of the Central Government, on being satisfied that the securities sought to be listed were not unduly concentrated in a few hands.

It also empowered the Central Government to waive or relax the strict enforcement of any or all of the requirements with respect to listing prescribed by the SCRR. Depending on the circumstances, the minimum size of the public offer was being relaxed frequently by means of administrative guidelines. A variety of relaxations was granted to Foreign Exchange Regulation Act (FERA) companies, new companies with foreign/NRI equity participation, etc., while a variety of further requirements such as minimum issued capital, minimum public offer in terms of face value, minimum number of public shareholders, etc., were prescribed. Relaxations were granted for individual companies on a case-by-case basis as well as for classes of companies. A major relaxation was granted by permitting non-FERA companies incorporated in India at least ten years prior to the date of the listing application or companies with a profit-earning record for at least four out of the five years prior to the date of the listing application to get listed on a stock exchange with a public offer of at least 40% of the issued capital.

Besides, such public offer, at the option of the company, could be made in two stages, viz., the first 20% at the time of initial public offer and the balance within three years of the date of listing on the recognized stock exchange. Thus, companies were allowed listing on the condition that they would make the second stage offer within three years to increase the public holdings to 40%. It was a different matter that there was no proper mechanism to monitor if the companies actually made their second offer within three years of enlistment.

The Securities Contract Regulation Rules, 1957 (SCRR) prescribes the requirements which have to be satisfied by companies for the purpose of getting their securities listed on any stock exchange in India.  The SCRR provides for the requirements which shall be complied with by public companies for the purpose of getting their securities listed on any stock exchange. One requirement seeks to ensure the availability of a minimum portion/number of shares (floating stock) of the listed securities with the public so that there is a reasonable depth in the market and the prices of the securities are not susceptible to manipulation. The SCRR seeks to achieve this by prescribing a minimum part of the issue to be offered to public by the company seeking listing on a recognized stock exchange. The listing agreement entered into by the company with the stock exchange requires the former to ensure minimum non-promoter holding on a continuous basis. Administrative guidelines issued by the government and the regulator also endeavour to ensure reasonable floating stock in the market and avoid concentration of stock in a few hands.

Rule 19(2) (b) prescribes for requirements with respect to the listing of Securities on a recognised stock exchanges and Rule 19A prescribes the requirement for continuous listing.

Rule 19(2)(b) Rule 19(2)(b) lays down that –

(i) At least twenty five per cent of each class or kind of equity shares or debentures convertible into equity shares issued by the company was offered and allotted to public in terms of an offer document; or

(ii) At least ten per cent of each class or kind of equity shares or debentures convertible into equity shares issued by the company was offered and allotted to public in terms of an offer document if the post issue capital of the company calculated at offer price is more than four thousand crore rupees.

Provided that the requirement of post issue capital being more than four thousand crore rupees shall not apply to a company whose draft offer document is pending with the Securities and Exchange Board of India on or before the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, if it satisfies the conditions prescribed in clause (b) of sub-rule 2 of rule 19 of the Securities Contracts (Regulation) Rules, 1956 as existed prior to the date of such commencement.

Provided further that the company, referred to in sub clause (ii), shall increase its public shareholding to at least twenty five per cent, within a period of three years from the date of listing of the securities, in the manner specified by the Securities and Exchange Board of India.

Rule 19A

Rule 19A provides for Continuous Listing Requirement which stipulates that –

(1) Every listed company other than public sector company shall maintain public shareholding of at least twenty five per cent. Provided that any listed company which has public shareholding below twenty five per cent, on the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, shall increase its public shareholding to at least twenty five per cent, within a period of three years from the date of such commencement, in the manner specified by the Securities and Exchange Board of India. Explanation: For the purposes of this sub-rule, a company whose securities has been listed pursuant to an offer and allotment made to public in terms of sub-clause (ii) of clause (b) of sub-rule (2) of rule 19, shall maintain minimum twenty five per cent, public shareholding from the date on which the public shareholding in the company reaches the level of twenty five percent in terms of said sub-clause.

(2) Where the public shareholding in a listed company falls below twenty five percent at any time, such company shall bring the public shareholding to twenty five percent within a maximum period of twelve months from the date of such fall in the manner specified by SEBI.

(3) Notwithstanding anything contained in this rule, every listed public sector company shall maintain public shareholding of at least ten per cent : Provided that a listed public sector company –

(a) which has public shareholding below ten per cent, on the date of commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2010 shall increase its public shareholding to at least ten per cent, in the manner specified by SEBI, within a period of three years from the date of such commencement;

(b) whose public shareholding reduces below ten per cent, after the date of commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2010 shall increase its public shareholding to at least ten per cent, in the manner specified by SEBI, within a period of twelve months from the date of such reduction.

To say, Listed Public Limited Company has to maintain 25% public shareholding and Public Sector Companies: 10%.

The provision quoted above require all listed companies in the private sector to achieve and maintain public shareholding of 25% of each class or kind of equity shares or debentures convertible into equity shares issued by such companies. Those companies with public shareholding of less than 25 % are required to achieve the same, within a period of 3 years from the date of commencement of the first amendment in the manner specified by SEBI.

In order to align the requirement in the listing agreement with the requirement specified in Rule 19 (2) (b) and 19 A of SCRR and to specify the manner in which public shareholding may be raised to prescribe minimum level, SEBI issued a circular on December 16, 2010 to amend Clause 40A of Listing Agreement for complying with the minimum public shareholding which is as under:

“Where the company is required to achieve the level of public shareholding as specified in Rule 19(2) and/ or 19A of the Rules, it shall adopt any of the following methods to raise the public shareholding to the required level:

(a) issuance of shares to public through prospectus; or

(b) offer for sale of shares held by promoters to public through prospectus; or

(c) sale of shares held by promoters through the secondary market.

For adopting methods as specified at point (c) the company agrees to take prior approval of the Specified Stock Exchange, which may impose such conditions as it may deem fit.”

SEBI issue another circular dated February 8, 2012 which provided that listed company may achieve the minimum public shareholding requirement through Institutional Placement Programme (IPP). Further to facilitate listed entities to comply with the minimum public shareholding requirements within the time specified in Securities Contracts (Regulation) Rules, 1957 SEBI issued a circular on August 29, 2012 specified the following additional methods:-

(a) Rights Issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, whether present or future, that may arise from such issue.

(b) Bonus Issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, whether present or future, that may arise from such issue.

(c) any other method as may be approved by SEBI, on a case to case basis.

Clause 40A of Listing Agreement

Minimum level of public shareholding

(i) The issuer company agrees to comply with the requirements specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957.

(ii) Where the issuer company is required to achieve the minimum level of public shareholding specified in Rule 19(2)(b) and/or Rule 19A of the Securities Contracts (Regulation) Rules, 1957, it shall adopt any of the following methods to raise the public shareholding to the required level:-

(a) issuance of shares to public through prospectus; or

(b) offer for sale of shares held by promoters to public through prospectus; or

(c) sale of shares held by promoters through the secondary market in terms of SEBI circular CIR/MRD/ DP/05/2012 dated February 1, 2012; or

(d) Institutional Placement Programme (IPP) in terms of Chapter VIIIA of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended; or

(e) Rights Issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, whether present or future, that may arise from such issue; or

(f) Bonus Issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, whether present or future, that may arise from such issue; or

(g) any other method as may be approved by SEBI, on a case to case basis.

40 B – Take Over Offer

Under this clause, it is a condition for continued listing that whenever the take-over offer is made or there is any change in the control of the management of the company, the person who secures the control of the management of the company and the company whose shares have been acquired shall comply with the relevant provisions of the SEBI (Substantial Acquisition of Shares and Take-overs) Regulations, 2011.

Central Listing Authority

As and when the Central Listing Authority is constituted by SEBI or any authority under the relevant law in relation to listing / delisting and trading / suspension of trading in securities of companies on a stock exchange, the provisions, guidelines, norms and procedures governing the listing / delisting and trading / suspension of trading in securities that may be stipulated by such Central Listing Authority shall then be incorporated in the Bye-laws of the Exchange and shall be made applicable mutatis mutandis by the Exchange.

Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 has brought major changes in continuous listing of Companies. There is much complying and to follow.

(Author is a renowned Corporate Law & Tax Consultant and can be reached at sgr@sgrgupta.com)

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