Re-classification of Promoters and Promoter Group of Listed Entity

Introduction

Shareholders in a listed company are classified under two broad categories, i.e. those that belong to the promoter/promoter group and those shareholders who are members of the public with no formal relationship with the promoter/promoter group.

According to regulation 2(00) of SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2018, “promoter” shall include a person:

• who has been named as such in a draft offer document or offer document or is identified by the issuer in the annual return referred to in section 92 of the Companies Act, 2013; or
• who has control over the affairs of the issuer, 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 issuer is accustomed to act. Provided that this clause shall not apply to a person who is acting merely in a professional capacity.

It is to note that a financial institution, scheduled bank, foreign institutional investor and mutual fund shall not be deemed to be a Promoter / Promoter Group merely by holding 10% or more of the equity share capital of the issuer. However, they would be treated as Promoter / Promoter Group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them.

 Why there is need for re-classification?

SEBI Takeover Code and Insider Trading Regulation requires promoter to comply with various Transitional, Event Based, Annual and Pledge Disclosures with Target Company and Stock Exchanges including dealings restrictions during the period of closure of trading window. So promoters needs to comply with various regulations even if, in some cases, he is not controlling the affairs of the company or sold majority of its shares or has no direct or indirect relationship with the company. This requires re-classification from promoter to public so as to avoid compliances under various SEBI regulations applicable to promoters and promoter group.

 Current Regulatory framework for re-classification

Regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 lays down conditions pursuant to which promoters/promoter group of a listed entity can be reclassified as public shareholders. Such re-classification of the status of any person as a promoter or public shall be permitted by the stock exchanges only upon receipt of an application from the listed entity along with all relevant documents subject to compliance with conditions specified in these regulation.

Pre-conditions for re-classification of promoter or promoter group

The following are the pre-condition for re-classification of promoter or promoter group. The promoters or promoter group seeking re-classification shall not:

(i) together, hold more than 10% of the total voting rights in the listed entity;

(ii) exercise control over the affairs of the listed entity directly or indirectly;

(iii) have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements;

(iv) be represented on the board of directors (including not having a nominee director) of the listed entity;

(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.

Pre-conditions for listed entity in which promoter or promoter group seeking re-classification

The listed entity shall:

(i) be compliant with the requirement for minimum public shareholding as required under regulation 38 of LODR 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.

Step wise process for re-classification

1. The promoters seeking re-classification shall make a request for re-classification to the listed entity which shall include rationale for seeking such re-classification and how the conditions specified above are satisfied.

2. The board of directors of the listed entity shall analyze the request 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. There shall be a time gap of at least 3 months but not exceeding 6 months between the date of board meeting and the shareholder’s meeting considering the request of the promoters seeking re-classification.

3. The request of the promoters seeking re-classification shall be approved in the general meeting by an ordinary resolution in which the promoters seeking re-classification and persons related to the promoters seeking re-classification shall not vote to approve such re-classification request.

Waiver of Shareholders approval

In the case of M/s. Alembic Pharmaceuticals Limited, Alembic sought guidance from SEBI regarding requirement of shareholder approval for reclassification of shareholding from promoter group to public category. Their submission was based on the fact that 5 out of 25 persons who were part of the promoter group were desirous of reclassification of their shareholding from promoter group to public category who were not directly or indirectly connected with any activity of Alembic as they were senior citizens leading their lives and occupations independently. Other reasons given for reclassification were that such persons never held any position of key managerial personnel and they did not have any special rights through formal or informal arrangements with Alembic or any person in the promoter group, etc. In this matter, SEBI clarified that shareholder’s approval is not required for reclassification of shareholding from promoter group to public category. In another case of M/s. Gujarat Ambuja Exports Limited, SEBI had exempted the company from obtaining approval of shareholder for reclassification of one its promoters on the similar grounds.

4. Once shareholders approves the request for re-classification, an application for re-classification is required to be made to the stock exchanges by the listed entity within 30 days from the date of approval of shareholders in general meeting.

5. Stock exchanges will approve the request based on the application submitted by the listed entities. Where entities listed on more than one stock exchange, the concerned stock exchanges shall jointly decide on the application.

Conditions to be complied after re-classification

The promoters seeking re-classification, subsequent to re-classification as public, shall comply with the following conditions:

> S/he shall continue to comply with the following conditions at all times from the date of such re-classification failing which, he shall automatically be reclassified as promoter/ persons belonging to promoter group, as applicable;

• • together, hold more than 10% of the total voting rights in the listed entity;
  • exercise control over the affairs of the listed entity directly or indirectly;
  • have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements.

> S/he shall comply with the following conditions for a period of not less than 3 years from the date of such re-classification failing which, he shall automatically be reclassified as promoter/persons belonging to promoter group, as applicable.

• • be represented on the board of directors (including not having a nominee director) of the listed entity;
  • act as a key managerial person in the listed entity.

Proposed amendments

SEBI on 23^rd November, 2020 has issued a Consultation Paper on re-classification of Promoter/Promoter Group entities. At present SEBI has been granting relaxations from the requirements under regulation 31A of the LODR regulations on a case to case basis to promoters who have found reclassification difficult under current regulatory regime.  The said paper has been issued on the basis of the recommendations of the Primary Market Advisory Committee (‘PMAC’) of SEBI in order to regularise the provisions relating to reclassification and minimise the need for providing relaxation on case-to-case basis.

Relaxing the threshold of maximum voting rights

At present Regulation 31A (3) (b) (i) of LODR regulations provide that promoter/persons belonging to promoter group seeking re-classification should not together hold more than 10% of the total voting rights in the listed entity. The Consultation Paper proposes to increase the threshold of 10% to 15%, to enable those promoters who have shareholding of less than 15% but are no longer involved in the day-to-day control of the listed entity to opt-out from being classified as promoters, without having to reduce their share-holding.

Reduction in time period between board and shareholders meeting

As mentioned above, Regulation 31A (3) (a) (ii) provides that the time gap between the meeting of the board at which the proposal for reclassification was accepted and the meeting of the shareholders, seeking approval for the same should be at least 3 months. The rationale behind the same was to give adequate time to the shareholders for considering the request of the promoter. However, time gap 3 months resulted in an increase in the total time taken in the process. In order to increase both cost and time efficiency, the Consultation Paper proposes to reduce the minimum time gap from 3 months to 1 month.