CS Ayushi Jain

CS Ayushi JainSEBI has issued SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015 (“SEBI LODR Regulations”) on September 2, 2015 which was enforced with effect from December 1, 2015 other than regulation 31A and 23(4) which were effective from September 2, 2015.

Regulation 31A of SEBI LODR Regulations provides for disclosure of class of shareholders and conditions for reclassification of shareholders of listed entities in limited circumstances. The Companies Act, 2013 is silent on this topic, however, general compliances will be applicable as per the process provided in the regulation.

SEBI on the recommendations of the Uday Kotak Committee on corporate governance dated July 24, 2018 has come out with proposals to simplify framework on re-classification of shareholders. In order to increase simplicity and bring greater clarity, SEBI has also proposed a single set of conditions applicable to all scenarios of re-classification of promoters as public shareholders.

Let’s discuss different types of scenarios for reclassification of shareholders from Promoter to Promoter/Public

1. Where a new promoter replaces the previous promoter subsequent to an open offer or in any other manner.

2. Where an entity becomes professionally managed and does not have any identifiable promoter.

3. Where there are multiple individuals classified as promoters out of which one does not wish to continue as one.

4. Where there are multiple promoters/promoter groups and a specific promoter/promoter group wishes to undergo re-classification.

5. Where the shares are transferred by way of transmission/succession/inheritance/gift by the promoters.

In case of reclassification from Public to Promoter, one shall require to make an open offer in accordance with the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

The application for reclassification by the listed entity in the above said 5 scenarios shall be made as per the following uniform procedure:

(A) Application by promoter to listed entity for re-classification.

(B) Disclosure regarding receipt of application for re-classification shall be made by company to stock exchange.

(C) Placing request of promoter before Board of Listed Entity for its positive or negative views.

(D) Based on Positive recommendation of Board, general meeting shall be called, for shareholders’ approval, with a time gap of atleast 6 months (a cooling off period) after the date of board meeting.

(E) Disclosure regarding dispatch of notice to shareholders shall be made by company to stock exchange

(F) Approval by Shareholders through ordinary resolution in all cases as presently it is required in limited cases.

It has also been suggested, in order to avoid conflict of interest that the specific promoter who has requested such reclassification, its promoter group and persons acting in concert shall not be permitted to vote on such resolution.

(G) Listed entities shall apply to Stock exchange for the same, subject to the condition that it shall be compliant entity in the manner prescribed.

(H) On being satisfied with the compliance of conditions mentioned in this regulation, Stock Exchange can allow modification or re-classification. Further, Joint decision shall be made by all the Stock Exchanges, in case entity is listed on more than one Stock Exchange.

(I) Disclosure regarding submission of decision of stock exchange made regarding the application to stock exchange

Applicable Conditions

The specific promoter, its promoter group and the Persons Acting in Concert would be required to follow following uniform set of conditions proposed:

  • On the date of application for re-classification, holding shall be less than or equivalent to 10% of voting power in listed entity. A specific person/entity therein (classified as a “specific promoter”), its promoter group and PACs cumulatively hold less than 5% of the aggregate shareholding and voting rights;
  • Increase in the level of public shareholding pursuant to re-classification of promoter shall not be counted towards achieving compliance with minimum public shareholding requirement under rule 19A of the Securities Contracts (Regulation) Rules, 1957, and the provisions of these regulations.
  • No control over the affairs of listed entity directly or indirectly.
  • No special right through any arrangements or agreements and all shareholding agreements granting special rights to such entities shall have been terminated
  • Neither acting on Board of entity nor in the management (including not having a nominee director)
  • Name of promoter not to be included in the list of wilful defaulters as per RBI Guidelines

Further, the Board may relax any condition for re-classification in specific cases, if it is satisfied about non-exercise of control by the outgoing promoter or its persons acting in concert.

The Board has made changes in the following existing framework:

  • Application to Stock Exchanges can be made only by listed entity not directly by promoter
  • Cooling period of 6 months post Board meeting is prescribed.
  • Approval of shareholders has been recommended in all scenarios
  • The promoters are restricted to continue to have any special rights through formal or informal arrangements and all such agreements shall be terminated post-re-classification.
  • The promoters and their relatives are restricted to act as KMP for a period of more than three years from the date of shareholders’ approval subject to the approval for such promoter to act as KMP has been granted by the specific resolution of the said shareholders’ meeting
  • The promoters along with the promoter group and the Persons Acting in Concert are required not hold more than 1% paid-up equity capital of the entity including any holding of convertibles/outstanding warrants/ Depository Receipts in scenario 2 mentioned above. However, the limit of 1% of paid-up share capital is too low to be able to classify the promoters from holding the entity. Hence, the Committee has suggested to merits an increase to 10% as even after ceasing to be in control.
  • The scenario 3 and 4 mentioned above has been introduced by the Committee to build a mechanism to enable such re-classification to ensure persons, who may have been promoters but are no longer in the day-to-day control and management and have a low shareholding, should also have the option to be reclassified.

Hope the information will assist you in your Professional endeavours.

Note:

1. Definition of Promoters

The Promoters are the persons who are having control over the affairs of the Company. They are the ones who have taken steps to bring the company into existence and are ultimately responsible for the kind of the company, presently it is.

Under the Companies Act, 1956, the term promoter, though used, was not defined. However, the Companies Act, 2013 has defined it under section 2(69).

  • who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or
  • who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
  • in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act except in professional capacity

Hence, one of the important element which classify a person as a promoter of a company is control. The term control as defined in Regulation 2(1)(e) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011:

Control includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner: provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position.

Therefore, it can be said that promoters are person with greater obligations under various legislative provisions and it is important to classify the persons into promoter and public category.

Author Bio

Qualification: CS
Company: APAC & Associates LLP
Location: Delhi, New Delhi, IN
Member Since: 12 Sep 2018 | Total Posts: 3

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