SAT Order on Minimum Public Shareholding Norms

The Securities
Appellate Tribunal issued its order
in the case involving compliance of the public shareholding norms in Gillette
India Limited. Gillette had filed an appeal against an order of the Securities
and Exchange Board of India (SEBI) rejecting Gilette’s proposal for compliance
with the public shareholding norms. However, SAT dismissed Gillette’s appeal in
an order that extensively considers the background and rationale for the public
shareholding norms in arriving at a decision.
The facts are
that Procter & Gamble India Holdings BV (P&G) is a promoter of Gillette
holding 75.9% voting rights. The Poddar group is the Indian promoter with 12.9%
voting rights. The total promoter holding is hence in excess of the 75%
permitted by the public shareholding norms. Therefore, Gillette’s proposal was
that the Poddar group would first transfer 4% of its shares to P&G.
Thereafter, the Poddar group would be classified as an ordinary public
shareholder as it would lose all its rights as a promoter (including by virtue
of termination of rights under the shareholders agreement and articles of
association). This approach was resisted by SEBI on the ground that this
militates against the spirit of the public shareholding norms in that the
promoter holding would in fact be increased rather than diluted in this
process.
In arriving at
its decision agreeing with SEBI’s views, SAT paid significant regard to the
history of the minimum public shareholding requirement so as to bring out the
true import and object of the rule. Although by virtue of a circular dated
August 29, 2012, SEBI has been authorised to approve a specific solution on a case-by-case
basis in exceptional situations if one of the prescribed methods of maintaining
public shareholding was not available, SAT decided to interpret this power of
SEBI in a narrow manner. For example, SAT noted:
In our
opinion, the Appellant seems to have overlooked, whether deliberately or
inadvertently, the fact that the underlying philosophy behind the requirement
of a minimum public holding of 25% is prevention of concentration of shares in
the hands of a few market players by ensuring a sound and healthy public float
to stave off any manipulation or perpetration of other unethical activities in
the securities market which would 
unfortunately be the irrefragable consequence of the reins of the market
being in the hands of a few.
In its order,
SAT has also clarified its preference for compliance with the minimum public
shareholding norms through one of the prescribed methods rather than through
more complex methods such as the one proposed in that case.

While SAT’s reasoning for
its conclusion is understandable, it is likely to create practical difficulties
at least on one count. Implicit in SAT’s reasoning is its hesitation to
recharacterise the Poddar group as a public shareholder rather than as a
promoter. This suggests that once a person has been indicated as a promoter of
a listed company, it is a tall order to shed this characteristic and the burden
appears quite high on the part of the person seeking to reclassify itself such
that it is no longer a promoter. This adds to the lack of clarity that pervades
the definition and description of the concept of a promoter.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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