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Meaning of Promoter/ Promoter Group

A promoter filing for reclassification as per the Issue of Capital and Disclosure Regulations, 2018 [hereinafter referred to as ICDR], would include a person who is:

  • named in the offer document as promoter;icdr
  • in control of the company;
  • in whose accordance advice, directions or instructions the board of directors of the issuer is accustomed to act.

A promoter group on the other hand would include relatives of the promoter and people/ body corporate in general who fall under the tag of ‘promoter group’, as mentioned in the prospectus.

What is Reclassification?

In case of listed companies, a promoter is burdened with onerous obligations of filing disclosures. These are mandated under different regulations.

These disclosures serve the purpose of Securities and Exchange Board of India (“SEBI”), i.e. to monitor and regulate the activities of the promoter and his company and ultimately to protect interest of investors in securities. However, the problem arises in those cases wherein a promoter who is no longer in control of the company or who has lost its control by way of any restructuring or by way of a takeover/merger/acquisition of the company or by any other means.

Being classified as a promoter does not only entail disclosure requirements but could also result in liabilities in the event of non-compliance or fraud by the real promoters i.e. the ones who are in control of the company.

Since, the promoter carries the burden of extensive disclosures and the risk of being liable for company’s non-compliances/malpractices, the promoter who has lost the control of the company, strives to be excluded from being categorised as “promoter” or “promoter group” and hence be reclassified as “public”.

Pre-condition for Reclassification of Promoter/Promoter Group

Regulation 31A of the SEBI (Listing and Disclosure Requirements) Regulation, 2015 [hereinafter referred to as LODR] provides the procedure for reclassification from the status of a promoter to public.

The following are the conditions which are need to be adhered to by a promoter who seeks reclassification.

Promoter and persons related shall not:

(i). Hold more than 10% voting rights,

(ii). Exercise control over the affairs (directly or indirectly)

(iii). Have any special rights through formal or informal arrangements, including shareholders agreement, and

(iv). Be represented on the board of directors or act as a key managerial personnel.

(v). act as a key managerial person in the listed entity

(vi). be a ‘wilful defaulter’ as per the Reserve Bank of India Guidelines

(vii). be a fugitive economic offender.

Post Re-classification:

The promoter(s) seeking re-classification, subsequent to re-classification as public shall

  • continue to comply with the aforesaid conditions (i), (ii) and (iii).
  • comply with the aforesaid conditions (iv) and (v) for a period of at least three years, from the date of reclassification.

If a promoter fails to maintain the aforesaid conditions, he will be automatically deemed to have been reclassified as a promoter/persons belonging to promoter group.

The following are the conditions which are need to be adhered to by the Listed Entity whose promoter/promoter group seeks reclassification:

The listed entity shall:

(i) be compliant with the requirement for minimum public shareholding as required under regulation 38 of these regulations;

(ii) not have trading in its shares suspended by the stock exchanges;

(iii) not have any outstanding dues to the Board, the stock exchanges or the depositories.

Steps to be followed by Promoter & the Listed Entity:

  • The promoter seeking re-classification shall present an application to the board of directors of the company and give the rationale for his reclassification and shall disclose how the aforesaid conditions are met.
  • The board of directors of the listed entity shall analyze the request in the immediately next board meeting or within three months from the date of receipt of the request from its promoter(s), whichever is earlier and place the same before the shareholders in a general meeting for approval along with the views of the board of directors on the request.
  • Time Gap between Board and Shareholder Meeting: There shall be a time gap of at least one month but not exceeding three months between the date of board meeting and the shareholder’s meeting considering the request of the promoter(s) seeking re-classification.
  • The request of the promoter(s) seeking re-classification shall be approved in the general meeting by an ordinary resolution in which the promoter(s) seeking re-classification and persons related to the promoter(s) seeking re-classification shall not vote to approve such re-classification request.
  • Thereafter, an application has to be made to the stock exchanges, which must approve the proposal subject to the promoter seeking reclassification having complied with conditions specified in Regulation 31A.

In case of promoter group being reclassified, the conditions as mandated for reclassification have to be satisfied by the shareholding group, considering the shareholding percentage, controlling rights, etc., of persons who are related to the existing promoter group member.

Wavier of Shareholder Approval

In following below mentioned cases, the shareholder approval are not required-

a). where the promoter(s) seeking reclassification and persons related to the promoter(s) seeking reclassification, together, do not hold more than one percent of the total voting rights in the listed entity;
b). where reclassification is pursuant to a divorce.

Timelines to be adhered to for Reclassification under Regulation 31A of SEBI (LODR) Regulations, 2015:

Sr. No. Particulars Duration
1. Application by the Promoter to the Company along with requisite undertaking. Intimation to  the Exchange within 24 hours of receipt of application.
2. Resolution must be passed in the meeting of Board of Directors for approving reclassification. Intimation to  the Exchange within 24 hours of conclusion of Board meeting.
3. Hold Shareholder’s meeting and pass ordinary resolution for approving reclassification. Not applicable to the cases falling under the categories mentioned in the proviso to Reg. 31A (3)(a)(iii) Ensure time gap of at least one month but not exceeding three months between the date of board meeting and the shareholder’s meeting.

Intimation to the Exchange within 24 hours of conclusion of Shareholder meeting.

4. Submit reclassification application along with supporting documents to the Exchange within 30 days of conclusion of shareholder’s meeting. For cases falling under the categories mentioned in the proviso to Reg. 31A (3)(a)(iii), application to be submitted along with supporting documents to the Exchange within 30 days of conclusion of Board’s meeting. 30 days of conclusion of shareholder’s or Board meeting as applicable.

Intimation to the Exchange within 24 hours of submission of application for re-classification of status as promoter/public by the listed entity to the stock exchanges.

5. Deficiencies in application must be rectified by the company within 5 days of intimation. 30 days of receipt of intimation.
6. Letter of acceptance to be issued to the Company to effect the reclassification. Intimation to the Exchange within 24 hours of receipt of Letter of acceptance by the company.

Note: If any public shareholder seeks to re-classify itself as promoter, it shall be required to make an open offer in accordance with the provisions of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

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DisclaimerThough full efforts have been made to state the interpretations correctly, yet the author is not responsible / liable for any loss or damage caused to anyone due to any mistake / error / omissions

Do write for any Queries/suggestions or Questions at cspriyapandey21@gmail.com

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