June 19, 2017

In June 2015, Sebi had put in a mechanism for re-classification of promoters of listed companies as public shareholders. Sebi defined promoters as those who hold 10% or more and are in control of the issuer; or are instrumental in the formulation of a plan after listing.

The Securities and Exchange Board of India or Sebi is likely to relax rules to make it easier for a public shareholder to become the promoter of a company, and vice versa, two people with direct knowledge of the development said.

Both the processes impose onerous terms but the one to become a public shareholder from a promoter is somewhat tougher, they said, requesting anonymity.

According to the existing norms, if a public shareholder wants to become the promoter of a listed company he needs to buy at least 25% stake and offer to buy more from public shareholders. On the other hand, if a promoter wants to become a public shareholder, he is required to cut his shareholding to 10% or lower if another entity comes and takes over as a promoter along with a subsequent open offer and a shareholder approval.

If there is no takeover but the promoter decides to reclassify himself as a public shareholder to turn the company into a professionally managed one, he needs to bring down his shareholding to 1% or lower. This becomes a difficult task for promoters, especially those with large stakes, because it is tough to find buyers for big stakes and the sale may impact the stock price as well as shareholders’ sentiment.

If there are multiple promoters, the task to reduce stakes to 1% or lower becomes even tougher.

This norm makes a promoter a distressed seller, said Yogesh Chande, a partner at law firm Shardul Amarchand Mangaldas and Co.

“As long as there is no control being exercised (directly or indirectly) by the outgoing promoter, such an outgoing promoter should be permitted to become a public shareholder of the target company without the requirement of the shareholding threshold falling below 1%,” said Chande.

The existing norms act as a major roadblock for smooth transactions by promoters and the basic ease of doing business, one of the two people cited above said.

“Sebi met investment bankers recently and is seriously considering harmonizing the promoter-holding rules for listed firms,” he said.

An email sent to Sebi remained unanswered.

In June 2015, Sebi had put in a mechanism for re-classification of promoters of listed companies as public shareholders. Sebi defined promoters as those who hold 10% or more and are in control of the issuer; or are instrumental in the formulation of a plan after listing.

There are no barriers for relatives or associates of promoters to enter into this class of “promotership”. But once a person has been named as a promoter, such person cannot become a public shareholder until he or she brings down the stake to 10% or below and obtain a shareholders’ approval.

“The norms on reclassification of promoters need an urgent relook,” said Sandeep Parekh, founder, Finsec Law Advisors. “Hardly one or two other countries have the concept of promoters enshrined in the law,” added Parekh.

Chande said that in case of takeovers and an open offer, as long as there is no control being exercised (directly or indirectly) by the outgoing promoter, the person should be permitted to become a public shareholder without any requirement of obtaining shareholders’ approval and without any requirement of shareholding threshold falling below 10%.

Along with meeting the takeover norms, the acquiring entity currently also needs shareholders’ approval to be elected as a promoter.

This rule too is likely to be simplified by altering the takeover norms, the two unidentified people cited above said.

Chande said the erstwhile whitewash provision, which allowed waiving off the requirement for an open offer if majority of the shareholders of the target company were to pass such a resolution, should be reintroduced.

“This provision will be helpful in situations involving bail-out takeover or a transaction involving preferential allotment,” added Chande.

[The Hindustan Times]