Non Compliance with Minimum Public Shareholding Law- Implications

Background: Regulation 38 of SEBI (LODR): Minimum Public Shareholding (MPS)

Regulation 38 under Chapter IV (Obligation of Listed Entity which has listed its specified securities) of securities and Exchange board of India (Listing Obligations and Disclosure Requirements) Regulations 2015, is as under

All listed companies have to comply with Minimum Public Shareholding norms, as laid down in Rule 19(2) and 19A of SCRR, in the manner specified by SEBI from time to time.

Whereas:

In rule 19, in sub-rule (2), in clause (b), before sub-clause (i), the following shall be inserted, namely:- “The minimum offer and allotment to public in terms of an offer document shall be-; (iii) in rule 19A, after sub-rule (3), the following new sub-rule shall be inserted, namely:-

“(4) Where the public shareholding in a listed company falls below twenty-five per cent in consequence to the Securities Contracts (Regulation) (Amendment) Rules, 2015, such company shall increase its public shareholding to at least twenty-five per cent. in the manner specified by the Securities and Exchange Board of India within a period of three years, as the case may be, from the date of notification of:

(a) the Depository Receipts Scheme, 2014 in cases where the public shareholding falls below twenty five per cent as a result of such scheme;

(b) the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 in cases where the public shareholding falls below twenty-five percent., as a result such regulations.”

The Securities and Exchange Board of India has directed stock exchanges  to crack the whip on companies that do not comply with the minimum public shareholding requirements vide Circular No. CFD/CMD/CIR/P/2017/115 dated 10th October, 2017. The regulator has asked exchanges to impose a fine on non-compliant companies, freeze promoter shares and bar promoters from being promoters in other listed companies till they do not comply is explained in detailed as follows:

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Kindly Note:

1. Fines as applicable shall be imposed prospectively from the date of circular.

2. Fines so received shall be credited to “Investor Protection Fund” of the concerned stock exchange.

3. Appropriate actions will be initiated, if there is default in payment of fines

4. Circular not applicable to those companies, where SEBI has already passed order in relation to non-compliance with MPS requirements.

OTHER IMPLICATIONS

• It may result in compulsory delisting of non-compliant listed entities in accordance with the provisions of the securities contracts (regulation) Act, 1956; the securities contract (regulation) rules, 1957 and the SEBI (Delisting of Equity Shares) regulations 2009 as amended time to time.
•  The recognized stock exchange may keep in the abeyance or withdraw the specific cases where specific exemption from compliance with MPS requirements under the Listing Regulation/ moratorium on enforcements proceedings has been provided under any Act, court / Tribunal orders etc.
• Reporting to SEBI will be made by recognized stock exchange of those entities which are non-compliant with MPS requirements as per norms/ methods prescribed by SEBI thereof

RESPONSIBILITIES ON SHOULDER OF RECOGNIZED STOCK EXCHANGE

• Shall review listed entities from time to time in relation to compliance of MPS based requirements.
• Notice to be issued within 15 days from date of observation of non-compliance.
• Disclosures to be made by recognized stock exchange on their website:

1. Name of non-compliant entities; amount of fine imposed; freezing of shares held and other actions taken

2. Status of compliance (whether complied or not)

• Action to be taken in interest of investors and securities market

Request all professional colleagues to provide feedback on the compilation. Thank you

DISCLAIMER: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors expressly disclaim all or any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document. READER SHOULD SEEK APPROPRIATE COUNSEL FOR YOUR OWN SITUATION. I SHALL NO BE HELD LIABLE FOR ANY OF THE CONSEQUENCES DIRECTLY OR INDIRECTLY.

(Author-CS Anjali Gorsia, Company Secretary In Practice from Nagpur (Maharashtra) and can be contacted at csanjali.gorsia@gmail.com)