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The Securities and Exchange Board of India, on November 23, 2020, came out with a consultative paper on promoter reclassification/promoter group entities as well as disclosure of promoter group entities in the shareholding pattern. The promoter classification has been a talking point since long, wherein the power to reclassify promoters was in the hands of the company instead of the promoter.
Table of Contents
A promoter filing for reclassification according to the issue of capital and disclosure regulations, 2018 shall include a person who is-
A promoter group would include relatives of the promoter and people/entities in general who come under the ambit of promoter group as specified in the prospectus.
The objective to introduce the amendments was to streamline the process as multiple informal guidance had caused an issue for all involved parties. The issue pertaining to these amendments started making headlines through some cases wherein the companies were left without any remedy against promoters who lost control and were still classified under the promoter tag.
Not only were the companies in a spot of bother, but certain requirements for reclassification like 10% shareholding, not being a member on board or key managerial personnel etc, made the implementation difficult. Therefore the SEBI has proposed a set of amendments to smoothen the process.
The following set of amendments were proposed by SEBI:
According to the present regulation, an outing promoter/promoter group seeking reclassification must not hold more than 10% of voting rights. It is proposed that the minimum that the threshold be increased from 10% to 5% in order to accommodate promoters who no longer are in day to day control of the company and seek to opt out without decreasing their shareholding.
It was suggested to reduce the present time gap between the board meeting date and the meeting of shareholders from three months time to one month time.
The present framework is silent on the exemption for reclassification made in relation to an order/direction of the government. SEBI has sought to extend the protection provided through section 31 of the IBC, 2016 to orders executed because of operation of the law. However, such promoters must not be in control of the listed entity while seeking the exemption.
The new management of the listed company would be able to reclassify a promoter who wasn’t traceable or co-operative thus making the process timely plus efficient. The exemption cometh with a rider, where the listed company must prove its reasonable efforts of reaching out to promoters, provided that they are not in control of entity.
This amendment is expected to riddle out the procedural irregularities wherein the intent of reclassification has been mentioned in letter of offer when made as per the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This amendment might exempt the promoter from filing the application, considering that the status of the promoter is public knowledge.
Currently, the regulation 31A mandates all entities falling under promoter/promoter group to disclose their shareholding, but SEBI observed that the listed companies didn’t comply with the regulation where the promoter was holding nil shareholding. The objective behind this amendment is to reiterate the adherence to these regulations through further clarity.
SEBI has approved certain amendments based on the said consultation paper:
It was suggested to reduce the present time gap between the board meeting date and the general meeting to one month. This change proposed in the consultation paper has been approved.
Expanding the scope to order/direction of government/regulator- This change proposed in the consultation paper has been approved.
The consultative paper was open for public comments until 24th December 2020. While most of the amendments answer present issues by making the regulations flexible, it has to be seen what more can be done. For instance, who can commence promoter reclassification should be established in cases where the promoter loses his/her control owing to enforcement of share pledge or boardroom tussle.
Read our article: Disclosures required under SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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