Sebi to outline framework for promoter-to-public reclassification

Discussion paper likely to cover 3 scenarios where a change in categorisation to public shareholders will be allowed

The Securities and Exchange Board of India (Sebi) is working on rules to govern how and when promoters will be allowed to reclassify themselves as public shareholders.

The move follows instances of promoters reclassifying themselves to meet the minimum public shareholding (MPS) norms. A discussion paper for public comment is likely to be issued soon, multiple sources have said.

The scenarios in which Sebi presently allows the reclassification include the signing of a separation agreement, duly disclosed, and promoter holding falling below five per cent. The regulator will also allow reclassification on a case-to-case basis if it feels the move is appropriate.

FROM PROMOTER TO PUBLIC

• The issue was first highlighted when Sebi disallowed a proposal by Gillette India which involved termination of the existing shareholder agreement to meet shareholding norms
• Promoters will be allowed reclassification if promoter holding falls below 5%
• Reclassification allowed in case of separation agreement
• After reclassification, promoter should not have any shareholder agreement with the company and cannot exercise control

“There was a need for this review. During the implementation of the mandatory requirement of 25 per cent public holding in private listed companies, it was observed that companies attempted to comply with the MPS norms by reclassifying a part of the promoter group entities as public,” said a source.

The issue was first highlighted when Sebi disallowed a proposal by Gillette India which involved termination of the existing shareholder agreement, so that the promoters could be termed public shareholders to meet the MPS norms. Similar instances took place involving Gokaldas Exports and Balmer Lawrie.

In June 2013, the Securities Appellate Tribunal (SAT), while hearing Gillette’s appeal, directed Sebi to look into instances where companies removed certain entities from the promoter group to the public category. “The regulator should not contemplate action but a solution,” Jog Singh, presiding officer of SAT had said.

Pursuant to this, Sebi’s Primary Market Advisory Committee discussed the issue and prepared a discussion paper.

Market participants say this move will help bring clarity for investors in businesses that have been run or are run by families. “Sebi in earlier instances had allowed reclassification on a case-to-case basis if there was a separation agreement or promoter holding had fallen below the prescribed five per cent. In cases where companies had approached Sebi for reclassification, it was based on precedence of similar scenarios. With Sebi defining a framework and having rules in place, it would help companies be more aware of the possibilities that fall in the realm of permissible,” said R S Loona, managing partner, Alliance Corporate Lawyers.

“Post reclassification, there should not be any other shareholding agreement in existence and the entity should only have rights that are vested with public shareholders,” said a source.

Another section of the markets believes the regulators should ensure reclassification of promoter holding should be viewed in a similar fashion by all of them. “Regulators could look at a one-time declaration on this matter, with any further amendment requiring a stock exchange notification. Additionally, provisions should be made that an entity which is a promoter for one regulator should be treated the same way by the other regulator,”said Amit Tandon, founder and managing director of IiAS, a proxy advisory firm.

Any entity that is later termed public would not be allowed to hold key management positions in the listed company or its associate and cannot exercise control over the affairs of the company. The companies would need to disclose the details and reason for reclassification to stock exchanges and the same would be permitted by Sebi only after 12-18 months, the sources added on what is being contemplated.