In an informal guidance issued to Mirza International Limited (“MIL”) on June 10, 2020, under the SEBI (Informal Guidance) Scheme, 2003, the Securities and Exchange Board of India (“SEBI”) has stated that daughters of the promoters are immediate relatives and are part of the promoter group by virtue of the definition of ‘promoter group’ under the SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2018 (“ICDR Regulations”), and if they hold more than 10% (ten percent) of the total voting rights in the listed entity, they are not eligible to seek re-classification from ‘promoter group’ to ‘public’ category. 

Following is a summary of the informal guidance issued by SEBI.

Facts:

1. MIL is a listed entity whose shares are listed on BSE Limited and National Stock Exchange of India Limited. Mr. Rashid Ahmed Mirza, promoter and managing director of MIL, holds 11.27% (eleven-point two seven percent) shares in MIL as on December 31, 2019. The consolidated shareholding of family of Mr. Rashid Ahmed Mirza including himself, his wife and his son in MIL is 24.1% (twenty-four point one percent).
2. Mr. Rashid Ahmed Mirza desires to gift some of his shares to his 2 (two) married daughters who are not involved in management of MIL and live independent lives. Both the daughters do not hold any shares in MIL and their names do not form part of ‘promoter & promoter group’ category under the shareholding pattern of MIL.
3. It has been represented by MIL that subsequent to transfer of shares by Mr. Rashid Ahmed Mirza to his 2 (two) married daughters, the names of the daughters would be included in shareholding pattern of MIL under the ‘promoter & promoter group’ category. However, daughters of Mr. Rashid Ahmed Mirza desire to be re-classified from ‘promoter & promoter group’ category to ‘public’ category as they do not have any involvement in the management of MIL and live independent lives.  

Guidance sought: 

In light of the aforesaid facts, MIL sought guidance on whether married daughters of Mr. Rashid Ahmed Mirza, promoter and managing director of MIL, holding more than 10% (ten percent) of the total voting rights in MIL, living separate lives and not being involved in the management of MIL, can be reclassified from the ‘promoter & promoter group’ to ‘public’ category under regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”).   

SEBI’s guidance: 

To address the query, SEBI referred to the following provisions of ICDR Regulations and LODR Regulations: 

Definition of ‘promoter group’ under regulation 2(pp) of the ICDR Regulations, which states as follows: 

““promoter group” includes:

the promoter;

an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse); and

…”  

Regulation 31A(3)(b) of the LODR Regulations:  

“(b) the promoter(s) seeking re-classification and persons related to the promoter(s) seeking re-classification shall not: 

together, hold more than ten percent of the total voting rights in the listed entity;

exercise control over the affairs of the listed entity directly or indirectly;

…” 

Regulation 31A(6) of the LODR Regulations: 

“In case of transmission, succession, inheritance and gift of shares held by a promoter/person belonging to the promoter group:

Immediately on such event, the recipient of such shares shall be classified as a promoter / person belonging to the promoter group, as applicable.

…” 

SEBI stated that as per the definition of ‘promoter group’ under regulation 2(pp) of the ICDR Regulations, the daughters of the promoters are immediate relative and hence are part of promoter group irrespective of the fact that they are married, living separate life or their non-involvement in management of the company. SEBI further stated that as per regulation 31A(6) of the LODR Regulations, immediately on gift of shares held by a promoter/ person belonging to the promoter group, the recipient will be classified as a promoter/ person belonging to the promoter group. 

SEBI subsequently referred to regulation 31A of the LODR Regulations which deals with conditions for re-classification of promoter group to public. SEBI stated that as per regulation 31A(3)(b)(i) of the LODR Regulations (as reproduced hereinabove) promoter(s) seeking re-classification and persons related to the promoter(s) seeking re-classification will not together hold more than 10% (ten percent) of the total voting right in the listed company. SEBI stated that in the instant case, 2 (two) married daughters of Mr. Rashid Ahmed Mirza, promoter and managing director of MIL, would hold more than 10% (ten percent) of the total voting rights of MIL post gift of shares by Mr. Rashid Ahmed Mirza to them. Therefore, pursuant to regulation 31A(3)(b)(i) of LODR Regulations, both the daughters of Mr. Rashid Ahmed Mirza (promoter) are not eligible to seek re-classification from the promoter group to public category.

This update has been contributed by Adity Chaudhury (Partner), Ashish Patel (Sr. Associate) and Kshitija Naik (Associate).