The Securities and Exchange Board of India (SEBI) came out with its consultative paper on “promoter reclassification/ promoter group entities and disclosure of the promoter group entities in the shareholding pattern”[1] to seek public comments on November 23, 2020.
The topic of promoter reclassification has been a talking point since 2015, wherein the power to reclassify promoters laid in the hands of the company, rather than the promoter. Therefore, it was observed by SEBI that the process provided too wide a net to alter the tag of a “promoter”. Hence, in 2018, SEBI revamped the procedure and came out with the now inserted Regulation 31A of Listing Obligations and Disclosure Requirements Regulations, 2015.
Only promoters holding minimum voting rights under 10% can file for such an application, as per the procedure laid down. This was further simplified by setting up a four-stage application process:
- Promoter shall file an application to the listed entity for reclassification;
- The company shall place the request of the promoter before its Board of Directors;
- Final approval shall be granted by the shareholders;
- The listed entity shall then make an application to the stock exchanges.
The objective behind introducing the amendments was to streamline the process as multiple informal guidance had created a spider’s web for all the involved parties. Nevertheless, the issue regarding these amendments again started making headlines through multiple cases, example: YES Bank, Zee Enterprises and Mindtree[2], wherein the companies were left remediless against promoters who had lost control and were still classified under the promoter tag.
Not only were the companies in a fiddle, but also certain requirements for reclassification such as 10% shareholding, not being a member on the Board, or a key managerial person, etc., had made the implementation cumbersome and difficult. Therefore, SEBI came up with the following set of proposed amendments to smoothen the process.
Meaning of Promoter/ Promoter Group
A promoter filing for reclassification as per the Issue of Capital and Disclosure Regulations, 2018, would include a person who is (a) in control of the company; (b) instrumental in formulation of a plan for offering specified securities to the public; or (c) named in the offer document as promoter.
A promoter group on the other hand would include relatives of the promoter and people/ entities in general who fall under the tag of ‘promoter group’, as mentioned in the prospectus.
Proposed amendments
1. Relaxation in minimum threshold of voting rights:
As per the current regulation, an outing promoter or promoter group seeking reclassification should not hold more than 10% of voting rights. It has been proposed that the minimum threshold be increased from 10% to 15% to accommodate those promoters who are no longer in day-to-day control of the company and wish to opt out without decreasing their shareholding.
2. Establishment of reasonable timelines to facilitate ease:
a. Reduction in time gap between Board and Shareholder meeting
It has been suggested to reduce the current time gap between the date of Board meeting and the shareholders meeting from an incessant time of three months to a much shorter time of one month.
b. Reduction in time to place reclassification request before the Board by listed companies
Regulation 31A is silent on the topic of timeline, related to a reclassification request being raised by the promoter/ promoter group and it being placed before the Board of the listed company. It is therefore believed that a strict and definite timeline of one month would rationalise the process and provide accountability on account of delay.
3. Exemptions of reclassification to accommodate an order/direction of the government or regulator
The current framework is silent on exemption for reclassification made pursuant to an order/ direction of the government. SEBI seeks to extend the same protection provided through Section 31 of the Inolvency and Bankruptcy Code, 2016, to orders executed due to operation of the law. However, such promoters should not be in control of the listed entity when seeking exemption.
4. Exemption from the re-classification procedure pursuant to an open offer
This amendment has been suggested to riddle out procedural irregularities where intent of reclassification has already been mentioned in the Letter of Offer when made in accordance with provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The amendment would exempt the promoter from filing the application as status of the promoter is public knowledge.
5. Exemption from re-classification procedure due to uncooperative promoters
This amendment pays heed to the earlier problem of a listed company not being able to reclassify promoters pursuant to an open offer. The new management of the listed company will be able to reclassify a promoter who was not traceable or co-operative, thereby making the process timely and efficient. The exemption comes with a rider, wherein the listed company will have to prove its reasonable efforts of reaching out to the promoters, provided they are not in control of the entity.
6. Disclosure of promoter group entities in shareholding pattern
Regulation 31A currently mandates all entities falling under promoter/ promoter group to disclose their shareholding. However, SEBI noticed that listed companies were not complying with the regulation where the promoter was holding nil shareholding. This amendment is therefore to reiterate the adherence to these regulations through further clarity.
The consultative paper was open to comments till December 24, 2020. While a majority of the amendments do answer current difficulties by making regulations more flexible, it is to be seen what more could be done. For instance, who can initiate reclassification of promoters needs to be established in cases where a promoter loses his/ her control due to enforcement of share pledge or boardroom tussle.
Further, the amendment is silent on the power of a listed company to reclassify a promoter who has lost his shareholding due to pledging of shares as in the case of Zee Group. While pledging of shares is a common activity for promoters, SEBI might have to sooner or later look into this aspect as currently promoters of 2,972 companies have pledged their shares up to a value of INR 2,20,708.38 crore[3].
[1] https://www.sebi.gov.in/reports-and-statistics/reports/nov-2020/consultative-paper-on-re-classification-of-promoter-promoter-group-entities-and-disclosure-of-promoter-group-entities-in-the-shareholding-pattern_48236.html
[2] https://www.thehindu.com/business/markets/sebi-may-permit-promoter-reclassification/article30054068.ece
[3] https://www.bloombergquint.com/opinion/promoter-reclassification-who-calls-the-shots