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Sebi mulls new rule for promoters turning public shareholders

Posted Date : 17-Dec-2013 , 08:41:46 am | Posted By CASANSAAR print Print

In the past one year, promoters of a few companies chose to re-classify themselves as public shareholders to comply with the rule that any listed firm must have a minimum public holding of 25%. The strategy did not go down well with the capital markets regulator, which feels that promoters took the easy way out to comply with regulations.


But now, the Securities & Exchange Board of India (Sebi) is working on a policy to allow promoters to describe themselves as public shareholders as long as the former give up their special rights and lower their stake to 5% or less in the companies concerned. 

"Also, such a promoter may have to step down from key managerial positions in the company as well as in other group entities, and refrain from exercising any control either directly or indirectly," ssaid a person familiar with the development. 

Some of the promoters had tried to re-classify themselves as public shareholders by altering the companies' Articles of Association (AoA). However, this could be done with promoters retaining full control over the company - a practice that Sebi disapproves. 




Sebi mulls new rule for promoters turning public shareholders

Since the regulator has refused to relax its stand on the 25% minimum public holding rule, promoters have been looking for ways to meet the shareholding requirement. Under the circumstances, Sebi, which came to know of instances of re-classification following complaints from investor associations, believes there is a need for a new set of rules that would comfort investors and avert court feuds. 

In some markets, company founders sacrifice their promoter status and the right to nominate board members without paring stakes. 

Sebi permits re-classification in case of buyouts, where the acquirer - or the new owner of the company who makes an open offer to other shareholders - emerges as the new promoter. In this case, the original promoter's stake is clubbed with the public shareholding. 

Securities lawyers, too, back this practice as the re-classification is followed by an open offer and adequate disclosures are made in the offer document. 

But what worries the regulator are cases of joint control, with one promoter not fully giving up the rights in favour of the acquirer (or the new buyer), they said. 

In companies such as Gillette IndiaBSE -1.33 % and garment exporter Gokaldas Exports, the original promoters changed the AoA to re-classify themselves as non-promoters. Following a legal battle, Sebi allowed the Poddar family, the original promoters of Gillette India, to re-classify themselves as public after they agreed to give up all special rights in the company, including management control. 

Corporate lawyers said the proposed rule - clearly laying down the conditions - will be a good move as it's not always possible for individuals or corporate entities to remain as promoters. 

"Sebi's recent clarification in the case of Gillette India reinforces the position that 'once a promoter is not always a promoter'. When a company undergoes a change in control, the names of the promoters also undergo a change. This is irrespective of the fact that the erstwhile promoters may continue to hold some residual stake in the company," said Akila Agarwal, partner, Amarchand & Mangaldas & Suresh A Shroff & Co. 

For instance, in 2011, when Cairn India sold its majority stake to the Vedanta Group, the residual shareholding of Cairn UK Holdings was re-classified as public shareholding since Cairn was no longer in control of the company. 

Agarwal said in some cases, the company could be under joint control for some time with the old promoter handing over the business to the new promoter like a private equity investor. 

But experts such as Sandeep Parekh think that Sebi may have taken a rigid stance on the subject. "Re-classification should be permitted freely subject to the same being backed by a statement asserting that they are no longer part of the promoter group," said Parekh, founder of FinSec Law Advisors. "There should be no maximum shareholding or other such rigid norms as a person may be a substantial holder. For example, private equity investors whose interests are more aligned with the minority shareholder rather than with the promoter."  (Economic Times)

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