SEBI

SEBI Provisions for Promoter Reclassification

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.

Meaning of Promoter/Promoter Group

A promoter filing for reclassification according to the issue of capital and disclosure regulations, 2018 shall include a person who is-

• In control of the company;
• Instrumental in formulation of the plan for offering specified securities to the public;
• Named in the offer document as the promoter.

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.

Objective behind introducing amendments

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.

SEBI provisions for promoter reclassification: Amendments proposed by SEBI

The following set of amendments were proposed by SEBI:

• Relaxation in minimum threshold of voting rights-

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.

• Establishment of reasonable time to facilitate ease-

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.

• Exemption of reclassification to accommodate an order of the government/regulator-

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.

• Exemption from the procedure of re-classification due to uncooperative promoters-

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.

• Exemption from the procedure of re-classification due to an open offer-

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^[1]. This amendment might exempt the promoter from filing the application, considering that the status of the promoter is public knowledge.

• Disclosure of promoter group entities-

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.

Latest Update-SEBI provisions for promoter reclassification

SEBI has approved certain amendments based on the said consultation paper:

• Minimum time period between board and general meeting-

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.

• Reclassification to accommodate an order of the government/regulator-

Expanding the scope to order/direction of government/regulator- This change proposed in the consultation paper has been approved.

Conclusion

The consultative paper was open for public comments until 24^th 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