[The
following guest post is contributed by Shashank
Prabhakar, a Senior Associate with Finsec Law Advisors. These are the
author’s personal views]
following guest post is contributed by Shashank
Prabhakar, a Senior Associate with Finsec Law Advisors. These are the
author’s personal views]
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 familial or
formal business ties with the promoter / promoter group. The Securities and
Exchange Board of India (SEBI), in its last concluded Board Meeting on June 23,
2015, has announced
its intention to put in place a regulatory mechanism for
re-classification of promoters of listed companies as public shareholders. Till
date, there were no specific rules in place which allow a promoter or a member
of a promoter group to exit this so called “group” and become a “public shareholder”.
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 familial or
formal business ties with the promoter / promoter group. The Securities and
Exchange Board of India (SEBI), in its last concluded Board Meeting on June 23,
2015, has announced
its intention to put in place a regulatory mechanism for
re-classification of promoters of listed companies as public shareholders. Till
date, there were no specific rules in place which allow a promoter or a member
of a promoter group to exit this so called “group” and become a “public shareholder”.
Regulation 2(za) of the SEBI (Issue of Capital
and Disclosure Requirements) Regulations, 2009 (ICDR Regulations) defines a
“promoter” to include (a) person or persons who are in control of the issuer;
or (b) person or persons who are instrumental in the formulation of a plan or
programme pursuant to which specified securities are offered to public; or (c) the
person or persons named in the offer document as promoters. “Promoter group” inter alia includes promoters, their
immediate relatives (spouse, parents, siblings, children of the person or that
of spouse) and any body corporate in which 10% or more of the equity share
capital is held by the promoter or an immediate relative of the promoter or a
firm or Hindu Undivided Family (HUF) in which the promoter or any one or more
of his immediate relative is a member. Those shareholders falling outside the
scope of promoter / promoter group definitions are considered to be public
shareholders.
and Disclosure Requirements) Regulations, 2009 (ICDR Regulations) defines a
“promoter” to include (a) person or persons who are in control of the issuer;
or (b) person or persons who are instrumental in the formulation of a plan or
programme pursuant to which specified securities are offered to public; or (c) the
person or persons named in the offer document as promoters. “Promoter group” inter alia includes promoters, their
immediate relatives (spouse, parents, siblings, children of the person or that
of spouse) and any body corporate in which 10% or more of the equity share
capital is held by the promoter or an immediate relative of the promoter or a
firm or Hindu Undivided Family (HUF) in which the promoter or any one or more
of his immediate relative is a member. Those shareholders falling outside the
scope of promoter / promoter group definitions are considered to be public
shareholders.
According to the SEBI press release, a promoter’s
shareholding may be reclassified and can become public shareholding in three
situations, i.e., when (a) there is a change in the promoter; or (b) death of
the person named as promoter; or (c) when a company becomes professionally
managed. I shall now analyze all the three situations and the conditions thereunder
that need to be satisfied for successful reclassification.
shareholding may be reclassified and can become public shareholding in three
situations, i.e., when (a) there is a change in the promoter; or (b) death of
the person named as promoter; or (c) when a company becomes professionally
managed. I shall now analyze all the three situations and the conditions thereunder
that need to be satisfied for successful reclassification.
Change
in promoter
in promoter
A change in the promoter of a company may occur
when a new promoter replaces the existing promoter through an acquisition of
shares or control that results in an open offer being made under SEBI’s
Takeover Regulations or in any other manner, subject to two more conditions:
(a) that the outgoing promoter’s shareholding is less than 10% and (b) the
outgoing promoter will have to obtain the approval of the shareholders of the
company in a general meeting for de-classification as a promoter (which seems
to be an ordinary resolution).
when a new promoter replaces the existing promoter through an acquisition of
shares or control that results in an open offer being made under SEBI’s
Takeover Regulations or in any other manner, subject to two more conditions:
(a) that the outgoing promoter’s shareholding is less than 10% and (b) the
outgoing promoter will have to obtain the approval of the shareholders of the
company in a general meeting for de-classification as a promoter (which seems
to be an ordinary resolution).
These two conditions appear confounding. As is
clear from the definition of promoter, no shareholder approval is necessary for
one to be named as promoter. There are no barriers to entry into this club of
“promotership”. As per the definition, the promoter does not even have to hold
10% of the target’s equity to call such shareholder a promoter. But once a
person been named as a promoter, such person cannot become a public shareholder
until he or she hold less than 10% and
obtain shareholders’ approval! What if the existing promoter holds more than
10% but obtains the approval of the shareholders to continue as a public
shareholder? Or consider a situation where the existing promoter never held
more than 10% and a new promoter replaces such person by making an open offer
to acquire shares and control under the Takeover Code. Will the existing
promoter still have to take the shareholders’ approval in a general meeting to
be re-classified as a public shareholder if such person decided to hold on to the
stake (which was less than 10% to begin with) for mere investment purposes with
no role to play in the management of the company? From that perspective, the
imposition of a 10% threshold in order to be eligible for re-classification
appears to be wholly arbitrary. The rationale for obtaining shareholders’
approval is also unclear and it may prove to be onerous not only for the
existing promoter but also for the new promoter and the company, as they will
now have to expend considerable resources in calling for a general meeting and
putting this item up for vote. It is also unclear as to how it may benefit the
company or the public shareholders, if at all.
clear from the definition of promoter, no shareholder approval is necessary for
one to be named as promoter. There are no barriers to entry into this club of
“promotership”. As per the definition, the promoter does not even have to hold
10% of the target’s equity to call such shareholder a promoter. But once a
person been named as a promoter, such person cannot become a public shareholder
until he or she hold less than 10% and
obtain shareholders’ approval! What if the existing promoter holds more than
10% but obtains the approval of the shareholders to continue as a public
shareholder? Or consider a situation where the existing promoter never held
more than 10% and a new promoter replaces such person by making an open offer
to acquire shares and control under the Takeover Code. Will the existing
promoter still have to take the shareholders’ approval in a general meeting to
be re-classified as a public shareholder if such person decided to hold on to the
stake (which was less than 10% to begin with) for mere investment purposes with
no role to play in the management of the company? From that perspective, the
imposition of a 10% threshold in order to be eligible for re-classification
appears to be wholly arbitrary. The rationale for obtaining shareholders’
approval is also unclear and it may prove to be onerous not only for the
existing promoter but also for the new promoter and the company, as they will
now have to expend considerable resources in calling for a general meeting and
putting this item up for vote. It is also unclear as to how it may benefit the
company or the public shareholders, if at all.
It also seems that SEBI wants the outgoing
promoters to have very little, if not nothing, to do with the target company after
they have been re-classified as public shareholders. The Press Release
specifies that the outgoing promoter will have to obtain prior approval of the
shareholders of the target if he or she wants to continue as a key managerial
employee (KMP) in the target and in any case their appointment cannot exceed 3 years
from the date of the shareholders’ approval. I find this condition very
perplexing. What is the specific market failure or lacunae in corporate
governance norms, if any, that SEBI is trying to address? It is obvious that
SEBI is trying to prevent a Diageo vs. Dr. Vijay Mallya type of situation, in
the future, by not only making it more difficult to retain erstwhile promoters
in a professional capacity but also by imposing an absolute ban on them from
continuing in the company for more than three years.
promoters to have very little, if not nothing, to do with the target company after
they have been re-classified as public shareholders. The Press Release
specifies that the outgoing promoter will have to obtain prior approval of the
shareholders of the target if he or she wants to continue as a key managerial
employee (KMP) in the target and in any case their appointment cannot exceed 3 years
from the date of the shareholders’ approval. I find this condition very
perplexing. What is the specific market failure or lacunae in corporate
governance norms, if any, that SEBI is trying to address? It is obvious that
SEBI is trying to prevent a Diageo vs. Dr. Vijay Mallya type of situation, in
the future, by not only making it more difficult to retain erstwhile promoters
in a professional capacity but also by imposing an absolute ban on them from
continuing in the company for more than three years.
Promoter
by way of inheritance
by way of inheritance
SEBI has clarified that in cases of transmission
/ succession / inheritance, the inheritor shall be classified as a promoter. The
press release can be treated as a mere clarification of the existing legal
position. Regulation 10 of the Takeover Regulations provides an exemption from
making an open offer in cases of transmission / succession / inheritance.
/ succession / inheritance, the inheritor shall be classified as a promoter. The
press release can be treated as a mere clarification of the existing legal
position. Regulation 10 of the Takeover Regulations provides an exemption from
making an open offer in cases of transmission / succession / inheritance.
Re-classification
when no identifiable promoter
when no identifiable promoter
SEBI has allowed existing promoters to be
re-classified as public shareholders where the company becomes professionally
managed and does not have any identifiable promoter provided that no person or
group along with persons acting in concert with them can collectively hold more
than 1% of the company’s shares. However, mutual funds / banks / insurance
companies / financial institutions / FPIs can
each hold up to 10% of the shares of the company. Most listed companies in
India are family run and professionally managed firms are few and far between.
re-classified as public shareholders where the company becomes professionally
managed and does not have any identifiable promoter provided that no person or
group along with persons acting in concert with them can collectively hold more
than 1% of the company’s shares. However, mutual funds / banks / insurance
companies / financial institutions / FPIs can
each hold up to 10% of the shares of the company. Most listed companies in
India are family run and professionally managed firms are few and far between.
As far as the first condition is concerned, I
feel that the threshold of 1% is extremely low. There could be situations where
the existing promoters may cease to exercise control or manage the affairs of
the company, directly or indirectly, but may want to retain their shares for
purely investment purpose and continue in the company as a public shareholder. By
setting the threshold so low it also appears that SEBI is not comfortable with
a promoter-less company.
feel that the threshold of 1% is extremely low. There could be situations where
the existing promoters may cease to exercise control or manage the affairs of
the company, directly or indirectly, but may want to retain their shares for
purely investment purpose and continue in the company as a public shareholder. By
setting the threshold so low it also appears that SEBI is not comfortable with
a promoter-less company.
It is also crystal clear that SEBI is not in
favour of a situation where the erstwhile promoter holds an important position
in the company. He / she is required to obtain the shareholders’ approval to
continue as a KMP and in any case the appointment cannot exceed more than 3
years from the date of approval.
favour of a situation where the erstwhile promoter holds an important position
in the company. He / she is required to obtain the shareholders’ approval to
continue as a KMP and in any case the appointment cannot exceed more than 3
years from the date of approval.
Additional
Conditions
Conditions
SEBI has also imposed certain additional
conditions which are required to be satisfied for completion of
reclassification, the most important of which are: (a) The existing promoter shall not have
any special rights through any formal or informal arrangements; (b) even after
the existing promoter’s shares have been reclassified as public, his / her
shareholding cannot be counted towards achieving minimum public shareholding norms
under the listing agreement read with Section 19A of the SCRA.
conditions which are required to be satisfied for completion of
reclassification, the most important of which are: (a) The existing promoter shall not have
any special rights through any formal or informal arrangements; (b) even after
the existing promoter’s shares have been reclassified as public, his / her
shareholding cannot be counted towards achieving minimum public shareholding norms
under the listing agreement read with Section 19A of the SCRA.
The draft paper on promoter
reclassification that
was released by SEBI for public comments specified that “post-reclassification, no shareholding agreement shall exist and all
past agreements between (i) outgoing promoter / promoter group entities and the
continuing promoter / promoter group entities and (ii) outgoing entities and
the company, shall be made null and void.” The SEBI Notification of October 3, 2013, has allowed promoters of listed
companies to enter into shareholders’ agreement with certain special rights
between such shareholders. For example, put and call options, tag along rights,
drag along rights, etc. under shareholders’ agreements are now valid. The
existence of put and call options between two shareholders does not threaten
either the company or other shareholders who are not party to the shareholders’
agreements. Further, the very concept of “special rights” is vague and will
need to be clarified by SEBI. The existence of such rights between shareholders
does not create any confusion as far as deciding the issue of control of the
target company is concerned. It would have been acceptable for SEBI to bar the
existing promoter from entering into any agreement which would confer voting
rights on him / her disproportionate to his / her shareholding, but to ban all
“special rights” seems a little excessive.
reclassification that
was released by SEBI for public comments specified that “post-reclassification, no shareholding agreement shall exist and all
past agreements between (i) outgoing promoter / promoter group entities and the
continuing promoter / promoter group entities and (ii) outgoing entities and
the company, shall be made null and void.” The SEBI Notification of October 3, 2013, has allowed promoters of listed
companies to enter into shareholders’ agreement with certain special rights
between such shareholders. For example, put and call options, tag along rights,
drag along rights, etc. under shareholders’ agreements are now valid. The
existence of put and call options between two shareholders does not threaten
either the company or other shareholders who are not party to the shareholders’
agreements. Further, the very concept of “special rights” is vague and will
need to be clarified by SEBI. The existence of such rights between shareholders
does not create any confusion as far as deciding the issue of control of the
target company is concerned. It would have been acceptable for SEBI to bar the
existing promoter from entering into any agreement which would confer voting
rights on him / her disproportionate to his / her shareholding, but to ban all
“special rights” seems a little excessive.
The
second condition, interestingly, creates a third category of shareholders who
are neither promoters nor public shareholders! Post re-classification, for the
limited purpose of calculating the company’s total public shareholding for the
purpose of compliance with Section 19A of the SCRA read with clause 40A of the
listing agreement, the erstwhile promoter’s shareholding will not be considered
even though for all other purposes the erstwhile promoter is actually a public
shareholder!
second condition, interestingly, creates a third category of shareholders who
are neither promoters nor public shareholders! Post re-classification, for the
limited purpose of calculating the company’s total public shareholding for the
purpose of compliance with Section 19A of the SCRA read with clause 40A of the
listing agreement, the erstwhile promoter’s shareholding will not be considered
even though for all other purposes the erstwhile promoter is actually a public
shareholder!
Conclusion
In
light of the arguments presented above, I feel that SEBI has been over cautious
and has needlessly complicated the process of re-classification and made it onerous
on the outgoing promoter. A simpler approach would have been to subject the
issue re-classification of promoters to the test of “control” under the
Takeover Code, given that the definition of control takes into account both de
facto and de jure control and also given that it has been extensively tested in
courts / tribunals. Additional protections that SEBI may feel necessary can be
built on this basic premise. In such a scenario, if the outgoing promoter is
not found to be in “control” of the company, then he / she should not be
classified as a promoter. Those who seek re-classification of their
shareholding may apply to SEBI with reasons stating why they are not in
“control” of the company and SEBI may apply its mind and decide whether the
applicant’s shareholding is eligible for reclassification. It has been my
experience that SEBI has always insisted that those acquiring shares or control
under the Takeover Code have been asked to classify themselves as promoters of
the target company. Under this approach, once the open offer has been completed
and a new promoter has been formally announced, the outgoing promoter can be
classified as a public shareholder, as has been done in many instances in the
past.
light of the arguments presented above, I feel that SEBI has been over cautious
and has needlessly complicated the process of re-classification and made it onerous
on the outgoing promoter. A simpler approach would have been to subject the
issue re-classification of promoters to the test of “control” under the
Takeover Code, given that the definition of control takes into account both de
facto and de jure control and also given that it has been extensively tested in
courts / tribunals. Additional protections that SEBI may feel necessary can be
built on this basic premise. In such a scenario, if the outgoing promoter is
not found to be in “control” of the company, then he / she should not be
classified as a promoter. Those who seek re-classification of their
shareholding may apply to SEBI with reasons stating why they are not in
“control” of the company and SEBI may apply its mind and decide whether the
applicant’s shareholding is eligible for reclassification. It has been my
experience that SEBI has always insisted that those acquiring shares or control
under the Takeover Code have been asked to classify themselves as promoters of
the target company. Under this approach, once the open offer has been completed
and a new promoter has been formally announced, the outgoing promoter can be
classified as a public shareholder, as has been done in many instances in the
past.
– Shashank Prabhakar