June 2013 deadline for compliance by listed companies with the minimum public
shareholding of 25% is looming closer. The deadline for compliance by public
sector (government) listed companies to comply with the 10% minimum public
shareholding will follow in August.
the last few months, several companies have already reduced their promoter shareholding
to meet with these norms. This has been accomplished through various facilities
provided by the Government and SEBI to achieve the minimum public shareholding
norms. SEBI has also provided specific exemptions and dispensations in certain
cases. The latest episode of The Firm has a comprehensive discussion
on the manner in which companies have gone about reducing their promoter
holdings and the various issues that have arisen in the process.
a rush to achieve these norms, there will certainly be a significant number of
companies that are unable to comply with them by the June deadline. SEBI has
been steadfast in its stance that it will not extend the time period for compliance.
these circumstances, a lawyer friend recently raised the issue of the possible
consequences of non-compliance by listed companies. In order to consider this,
we must note that the minimum public shareholding norms are embodied in Rule
19A of the Securities Contracts (Regulation) Rules, 1957 (SCRR) that was
introduced by way of amendment in 2010. In addition, the listing agreement in
clause 40A requires companies to comply with Rules 19(2) and 19A of the SCRR.
first consequence of non-compliance would be a delisting of securities on
account a breach of the listing agreement. As we have repeatedly argued before,
this would be a paradoxical tool to ensure compliance with listing norms. In
case of a delisting, it is the public shareholders who would suffer due to a
loss of liquidity and exit opportunity in the markets. Public shareholders
would be penalized by failure of the company and promoters to comply with norms
that are intended to benefit them. While this regulatory response exists on
paper, it must be exercised cautiously after considering the extensive impact
it may have.
second consequence would be penalties levied on the non-compliant companies.
Section 23E of the Securities Contracts (Regulation) Act, 1956 (SCRA) provides
that in case of failure to comply with the listing conditions, SEBI could
impose a penalty not exceeding Rs. 25 crores (rupees 250 million). SEBI could
potentially invoke this power in case the public shareholding norms are not met
by the deadline.
these measures exist on the statute books, it is a different matter as to how
they might be exercised by SEBI in practice. The past track record indicates
certain difficulties in the implementation of corporate and securities laws.
For example, when stringent measures of corporate governance were to be
introduced by amendments to clause 49 of the listing agreement in 2004, the
implementation was delayed several times and they came into effect only on
January 1, 2006. These include a tighter definition of board independence and
the like. Even thereafter, when SEBI tried to enforce the board independence
requirements against several listed companies, primarily in the public
(government) sector, it had to drop them subsequently.
make a comparison, during October and November 2008, SEBI passed a series of
orders involving the lack of appointment of the requisite number of independent
directors to several government companies, viz. NTPC Limited (Oct. 8), GAIL
(India) Limited (Oct. 27), Indian Oil Corporation Limited (Oct. 31) and Oil and
Natural Gas Corporation Limited (Nov. 3). The principal ground for dropping the
action was that in the case of the government companies involved the articles
of association provide for the appointment of directors by the President of
India (as the controlling shareholder), acting through the relevant
administrative Ministry. SEBI found that despite continuous follow up by the
government companies, the appointments did not take effect due to the need to
follow the requisite process and hence the failure by those companies to comply
with Clause 49 was not deliberate or intentional.
Returning to the public
shareholding norms, a lot would depend upon the stance adopted by SEBI for
enforcing them after the deadline has expired. While some of it may be known
post-June 2013 when the deadline for private sector companies expires, but the
real enforcement test may lie if there are violators among the public sector
companies, which will be clear subsequently.