Market regulator Sebi on Tuesday proposed new rules to allow reclassification of promoters at listed firms looking to become public shareholders.

The new norms can have a significant impact on the way some merger and acquisition deals are structured, as also in cases involving corporate restructuring that take place due to disputes among members of business families or after settlements between rival corporates.

Some of the scenarios where such re-classification has already been sought by promoters include cases of split in a promoter family, a main promoter selling majority stake to another investor, marriage between members of rival business families and a promoter group wanting to exit from day-to-day operations of a listed company.

As per the draft paper, an entity belonging to promoter or promoter group of listed companies may re-classify its shareholding to public category under three scenarios-Open Offer, 'Separation Agreement' and promoter group shareholding less than five per cent in a company. However, these re-classification is subject to certain restrictions.

Post reclassification, no shareholding agreement shall exist and all past agreements should be made null and void, Sebi said in its draft paper, adding "...such outgoing entities shall have only such rights as any other public shareholder".

At present, the regulatory framework does not prescribe any specific criteria for such re-classification, which Sebi feels is required to lend objectivity to the process of reclassification of promoters of listed companies as public shareholders under various circumstances.

The discussion paper, finalised after detailed deliberations by Sebi's Primary Markets Advisory Committee, has sought public comments till January 16.

According to the proposed rules, under three scenarios a promoter or promoter group can be re-classified as a public shareholder

These scenarios are-pursuant to an open offer, in case of a separation agreement, where terms of the separation agreement should be disclosed to the stock exchanges, prior to the reclassification and in case the promoter group holds less than five per cent shares in the company (including any convertibles/outstanding warrants/ADR/GDR Holding).

After re-classification, the outgoing entities would not hold any key management position in the company and other group firms.

They would not exercise, directly or indirectly, any control over the affairs of the company or any of the group firm. However, they should not be debarred from accessing the capital market.

In case of reclassification under 'separation agreement' and the promoter group holding less than five per cent shares in a company, Sebi said that the promoter group entity/ company would have to give intimation to bourses for such re- classification along with all the relevant details including reason for such move and shareholding of the said promoter group among others.

Besides, the re-classification will be permitted after expiry of one year from such intimation. Post the initial one year, such promoter group entity may be classified as public.

However, they shall not be considered to be part of public shareholders for another three years for the purpose of compliance with Sebi's 25 per cent minimum public shareholding requirement.

In case of reclassification under shareholding of less than five per cent scenario, such promoters should have been disclosed as promoters since at least three financial years prior to the year in which the said promoter/promoter group entities desires to re-classify its holding as public shareholders.

"Such outgoing entities shall not fall within the definition of 'promoter group' category in respect of the continuing promoter," Sebi noted.

Adopting a key non-legislative recommendation of the Financial Sector Legislative Reforms Commission (FSLRC) panel for overhaul of financial sector regulatory framework, Sebi is now coming out with draft proposal for all key regulations. (Businesstoday - CASANSAAR)