The provisions for re-classification of shareholders are detailed in Regulation 31A of SEBI (Listing Obligations and Disclosures Requirements) Regulations, 2015 [SEBI LODR Regulations] while Companies Act is silent on the same.
Regulation 31A of SEBI LODR Regulations covers four aspects of re-classification of shareholders from promoter group to public:
A. Re-classification in scenario where a promoter is replaced by a new promoter
B. Re-classification in scenario where a company becomes professionally managed, i.e. it ceases to have promoters
C. Approval of stock exchange
D. General Conditions
Approval of shareholder in general meeting is required in scenario A and B mentioned above.
Further, the holding of the promoter along with the promoter group and the persons acting in concert shall not be more than 10% of the paid-up equity capital of the entity in scenario A & not more than 1% in scenario B.
On July 24, 2018 Markets regulator SEBI along with the Uday Kotak Committee recommendations on corporate governance has come out with proposals to simplify existing framework on re-classification of promoters as public shareholders.
As the present norms has following limitations:
- It does not deal with situations where there are multiple individuals classified as promoters out of which one does not wish to continue as one.
In this case, the Kotak Committee had suggested that there should be a mechanism to enable such re-classification, to ensure persons, who may have been promoters but are no longer in the day-to-day control and management and have a low shareholding, should have the option to be reclassified.
- In cases where company becomes professionally managed, the limit of 1% of paid-up share capital is too low to be able to classify the promoters from holding the entity
In this case, the Kotak Committee had suggested to merits an increase to 10% as even after ceasing to be in control, the promoter may want to continue as financial investor with a shareholding of more than 1%, however he would not be able to hold such.
Therefore, the Committee has suggested revision in the existing provisions keeping the view that any reclassification would have to be done in a fair & transparent manner and in the interest of public shareholders.
Recommended Process of Re-classification of Shareholders by Kotak Committee
It has been proposed that if a promoter plans to be re-classified as a public shareholder, then the PROMOTER needs to first apply to the listed entity.
The listed entity would then seek the approval of the board and other shareholders through an ordinary resolution subject to following scenarios and fulfilment of respective conditions:
- In case there are multiple promoters/promoter groups and a specific promoter/promoter group wishes to undergo re-classification:
- The promoters, promoter group and PACs cumulatively hold 10% or more of the aggregate shareholding and voting rights in a listed entity;
- A specific person/entity therein (classified as a “specific promoter”), its promoter group and PACs cumulatively hold less than 5% of the aggregate shareholding and voting rights; and
- The specific promoter or its promoter group or PAC are neither on the board of directors nor in the management of the listed entity and are not acting in concert with other persons forming part of the promoter and promoter group,
2. In case there is only one specific promoter/ promoter group who/ which wishes to be re-classified and the entity wishes to be classified as professionally managed
- Such promoter or its promoter group or PAC for that promoter is/are neither on the Listed Entity Board nor in management of the company nor has a nominee director;
- Cumulative shareholding and voting rights of such promoter and its promoter group and PACs goes below 10%
- there are no other persons qualifying as promoters of the company
It has also been suggested, in order to avoid conflict of interest that the specific promoter who has requested such reclassification, its promoter group and persons acting in concert shall not be permitted to vote on such resolution.
Same Process and conditions has been specified by Committee in case one has become promoter through transfer of shares by way of transmission/succession/inheritance/gift.
Further, the listed entity should ensure a time gap (a cooling off period) of at least six months between the date of board and shareholder’s meeting considering the request of the promoter. As per our understanding, this cooling period has been provided to terminate or end the formal arrangements of promoter with the company as the proposed process provides that these kinds of arrangement which grants special rights shall be terminated prior to the application by the promoters to the board.
Thus, in order to increase simplicity and bring greater clarity, SEBI has proposed a single set of conditions applicable to all scenarios of re-classification of promoters as public shareholders.
Hope this article will clarify the proposed amendment!!!
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