The Securities and Exchange Board of India (“SEBI”) on November 23, 2020 issued a ‘Consultation Paper’ on ‘Re-classification of promoter/ promoter group entities and disclosure of promoter group entities in the shareholding pattern’ (“Consultation Paper”). The objective of the Consultation Paper is to seek comments/views from the public and market intermediaries on the process for reclassification of promoter/promoter group entities and the disclosure requirements for the same.
Under the current framework, the conditions with respect to reclassification of any person as promoter/public are laid down in regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). The board of directors of the listed entity has to analyse the request of promoter reclassification and place it before the shareholders in a general meeting for approval along with the views of the board. The resolution then needs to be voted upon with promoter seeking reclassification and entities related to promoters abstaining from voting.
1. Condition pertaining to minimum threshold of voting rights
Primary Market Advisory Committee (“PMAC”) has proposed that the eligibility threshold be relaxed from 10% (ten percent) to 15% (fifteen percent) so that the persons who may have been promoters but are no longer in day-to-day control having shareholding of less than 15% (fifteen percent) may “opt-out” from being classified as “promoters”, without having to reduce their share-holding.
2. In relation to the time gap between board and shareholders meeting, the following recommendation was made:
The time gap between the shareholders’ reclassification request and board meeting to consider the same is proposed to be brought down from three months to just one month. This would help shorten the reclassification process.
3. Reclassification pursuant to an order/direction of government/regulator
It has also been proposed that the reclassification criteria could be relaxed if it is being done following a government or a regulatory body’s order. Currently, such exemption is given only in case of Insolvency and Bankruptcy Code (“IBC”) cases as provided under regulation 31A(9) of LODR Regulations.
4. Reclassification of existing promoter pursuant to open offer
Exemption from the procedure for reclassification in cases of reclassification pursuant to an open offer made in accordance with the provisions of SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 2011 has also been proposed, provided the intent of the existing promoters to re-classify has been disclosed in the letter of offer.
5. There have been cases where, pursuant to an open offer, the new management of a listed entity was unable to reclassify the erstwhile promoters because they were un-traceable or non-cooperative and therefore was unable to procure reclassification request from the erstwhile promoters, thereby stalling the whole process. This resulted into old promoters continue to be classified as promoter despite losing control of the company. The requirement of promoter making an application for reclassification is a mere procedural formality. PMAC has proposed that the reclassification of such persons may be permitted provided the company has taken efforts to reach out to the erstwhile promoters and such outgoing promoters/ promoter group entities not being in control.
6. A time period of one month has been proposed for listed companies to place the reclassification request before the board of the listed company.
7. The disclosure of names of promoter group entities in the shareholder pattern has been proposed:
PMAC has proposed to tighten the disclosure requirements under Regulation 31 of LODR Regulations which mandates that all entities falling under promoter and promoter group shall be disclosed separately in the shareholding pattern. The names of entities that fall under the promoter group category need to be disclosed in the shareholding data even if they don’t hold any shares.
Please find a copy of the Consultation Paper here.
This update has been contributed by Adity Chaudhury (Partner) and Aditi Gupta (Associate).
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