[Sarthak Karol is an associate at a law firm in Mumbai]
By way of a Circular dated October 10, 2017, (“Circular”), the Securities and Exchange Board of India (“SEBI”) issued directions to stock exchanges to come down heavily on listed entities, their promoters and directors who are in breach of the 25% minimum public shareholding (“MPS”) norms mandated under regulation 38 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”). The Circular has been brought into force with immediate effect. In an effort to streamline the approach in the enforcement of MPS norms, SEBI laid down procedures for stock exchanges to impose fines on non-compliant companies, freeze promoter shares and even bar promoters from being promoters in other listed companies, all until such time that they fail to comply. This Circular is one of the steps SEBI has undertaken to maintain market integrity by acting as a check on defaulting companies.
The MPS requirements for listed companies have been stipulated in regulation 38 of the Listing Regulations, which mandates that a listed entity comply with the MPS requirements specified in rules 19(2) and 19A of the Securities Contracts (Regulation) Rules, 1957 (“SCRR”) read with section 21 of the Securities Contracts Regulations Act, 1956 and clause 40 of the Listing Agreement. Rule 19(2)(b) of the SCRR requires the maintenance of a minimum public shareholding of 25% at all times of each class or kind of equity shares or convertible debentures issued by a listed company. Regulations 97(1) and 98(1)(2) of Listing Regulations mandate stock exchanges to monitor compliance of MPS standards, and in situations of breach, allow stock exchanges to impose penalties.
The prescribed 25% limit of public participation ensures liquidity of shares and accurate price discovery in the market. The Securities Appellate Tribunal in the matter of Gillette Limited v. SEBI (2013) observed:
“….. the fact that underlying philosophy behind the requirement of a minimum public shareholding of 25% as a tool to prevent 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 accordance with the Circular, the stock exchanges have been conferred wide powers to check non-compliant entities. If stock exchanges, while reviewing shareholding patterns of listed entities, find any non-compliance with MPS requirements, they are required to issue notice to non-compliant entities within 15 days from the date of observation of non-compliance and advice entities to ensure compliance at the earliest by adopting methods laid down in SEBI circular No. CIR/CFD/CMD/14/2015 dated 30 November 2015. The stock exchanges have been empowered to impose a fine of ₹ 5000 per day in case a company is found to be in breach of MPS norms. Introduction of fines on a per-day basis would prevent belated compliances of MPS norms. In addition, stock exchanges have been directed to request depositories to freeze the entire shareholding of a promoter or promoter group in the company.
The above two actions shall continue till the time the non-compliant company fails to increase their public shareholding to the prescribed 25% limit. The stock exchange can even issue an intimation to the effect of restricting promoters, promoter group and directors of the listed non-compliant entity from holding any new position as a director in any other listed entity until the date of compliance. It is unclear whether an exemption or relief will be provided for genuine cases where the entity is unable to maintain the MPS norms due to incidental forfeiture of partly paid shares, buybacks or takeover offers, etc., that are beyond the company’s control. If it is not the case, the regulator expects promoters and entities to ensure the 25% public holding limit at all times, leaving no scope or window to rectify their actions.
If the non-compliant listed entity fails to rectify the MPS for a period of more than one year, the stock exchanges have been empowered to impose an increased fine of ₹ 10,000 per day and even ask the depositories to freeze all securities held in the demat account of the promoter and promoter group until the time such entity complies. As a strict measure, on case to case basis, stock exchanges are even initiate compulsorily delisting non-compliant entities. In the spirit of this Circular, the stock exchanges are even allowed to take any other appropriate actions against the non-compliant entities. In pursuance of any moratorium or exemption provided under any Act, Court or Tribunal order, etc., the stock exchanges can either withdraw or hold these actions. The undertone of wide ambit of powers given to the stock exchanges highlights the need for strict compliance with MPS norms.
As a mark of transparency and precedential value, the stock exchanges have to periodically disclose on their website names of the non-compliant entities, value of penalty imposed, holding of shares held by the promoters and promoter group and other actions taken against the company, as well as the status of compliance. This will act as a deterrence for other listed entities and ensure they maintain their shareholding within the prescribed MPS norms
The Circular applies prospectively to all entities that are non-compliant as on the date of this Circular, and it has no applicability to entities where orders have already been passed by SEBI in relation to non-compliance with MPS norms. Considering the Circular is effective immediately, it will be interesting to see whether non-compliant entities begin receiving notices from stock exchanges in the coming days.
SEBI in multiple orders has refused to accept arguments of non-compliant entities who, even though have taken multiple steps to rectify the MPS limit, have failed due to poor market conditions, losses incurred by the company, bad dividend history, adverse advice by merchant bankers, lack of interest of existing shareholders, etc. SEBI expects violators to exhaustively use any of the options available as per in SEBI circular No. CIR/CFD/CMD/14/2015 dated 30 November 2015 and ensure compliance with MPS norms. It is fascinating to note that SEBI has been persevering in its approach towards ensuring strict compliance with MPS requirement by ensuring consistency and uniformity in the procedures to be followed by stock exchanges. This Circular is nothing short of a strict warning for companies in breach of MPS norms to fall in line, rectify their positions or else face the music in the coming days.
– Sarthak Karol