The Securities and Exchange Board of India has issued an informal guidance relating to the Listing Agreement and the SEBI (Disclosure and Investor Protection) Guidelines (“DIP Guidelines“) that defies all logic and reason.
Clause 13.A.1.1(b) of the DIP Guidelines, which governs private placements to qualified institutional buyers, provides that a listed company ought to be in compliance with the prescribed minimum public shareholding requirements of the Listing Agreement in order to effect a qualified institutional placement (“QIP“).
Clause 40A (vii) and clause 40A(viii) of the Listing Agreement provides that where the public shareholding in a company falls below the minimum level of public shareholding on account of supervening extraordinary events such as the implementation of a scheme of arrangement, public shareholding ought to be restored, in consultation with the stock exchange, to the prescribed minimum level through one of the following methods:
(a) Issuance of shares to public through prospectus;
(b) Offer for sale of shares held by promoters to public through prospectus;
(c) Sale of shares held by promoters through the secondary market; or
(d) Any other method which does not adversely affect the interest of minority shareholders.
A listed company that had undergone a Scheme of Arrangement by merging another company into itself faced a fall in public shareholding and therefore desired to effect a QIP to restore public shareholding to the prescribed level. Since the DIP Guidelines required a company to be compliant with the Listing Agreement in order to be able to transact a QIP, the company sought an informal guidance from SEBI to confirm that it could indeed effect a QIP as a means of increasing public shareholding.
Since the very purpose of the QIP was to restore public shareholding to the minimum level, upon completion of the QIP, the company would be compliant with the Listing Agreement. SEBI has taken an unsustainable technical view. In an informal guidance, SEBI has said that a status of compliance with the Listing Agreement is a condition precedent to the eligibility to effect a QIP. Since the company in question is not compliant before the QIP, it did not matter that the QIP would be the transaction that would ensure compliance with the prescribed level of public shareholding. SEBI has ruled that the company would not be allowed to transact a QIP and has held that the company is ineligible under the DIP Guidelines.
SEBI’s view is not just amusing but also clearly violative of the purpose behind the DIP Guidelines. It is settled law that not just “guidelines”, but even other forms of securities laws made under the SEBI Act, as indeed regulatory law, have to be purposively construed, and not strictly construed on the lines of fiscal statute. The purpose of the Listing Agreement is to ensure that every company has a minimum public shareholding at a prescribed level. The stock exchanges are empowered to have a dialogue with the company and work out the means of attaining the prescribed level of public shareholding. In this case, the stock exchange and the company had agreed that the public shareholding would be restored, among others, by means such as QIP, which would only increase the shares held by the public.
SEBI’s informal guidance is contrary to the spirit of the DIP Guidelines and the Listing Agreement, each of which constitutes regulatory law formulated by SEBI. If a company seeks to comply with the prescribed level of minimum public shareholding, it is rather strange that SEBI should disallow the means of ensuring such compliance. So long as the QIP would push the company towards compliance with the salutary provisions prescribing minimum public shareholding, the purpose behind the law would have been achieved. The purpose behind the DIP Guidelines is to regulate private placements of securities within the parameters of the law. The QIP, in this case, would have promoted and furthered the cause of getting the company to comply with the law. However, SEBI, in its wisdom, has treated an eligibility clause in the Listing Agreement, on the lines of a condition of grant of a tax exemption, and by a narrow interpretation, has promoted the continued non-compliance with the Listing Agreement. This is a travesty.
Such a position would result in similarly-placed companies being forced to go in for public offerings, or sale of shares by promoter-shareholders. There is no reasonable object in the securities laws that would support forcing the adoption of such a mechanism. The right course for SEBI would have been to clarify that so long as the QIP results in the public shareholding level becoming compliant, the eligibility clause in the DIP Guidelines would not come in the way of the QIP.
An opportunity has been lost. It is not too late for SEBI to rectify this position and issue a correction in its view.
– Somasekhar Sundaresan
Post Script:-
Informal guidance letters contain the following disclaimer:-
“This letter does not express a decision of the Board on the question referred.“
While this line is to pre-empt such interpretative letters being treated as “orders” that can be challenged before the Securities Appellate Tribunal, it makes a mockery of the Informal Guidance Scheme itself. The question it raises is that if the position taken by SEBI is actually not a decision of SEBI, of what value at all is it? It is a waste of time and energy for all concerned including SEBI?