India: Public Shareholding In Listed Companies

"Listed Public Companies" means a public company which has any of its securities listed in any recognized stock exchange1. One of the advantages to the shareholder(s) of a Public Company is free transferability of shares and in case of Listed Companies such free transferability also ensures quick liquidity of investment. However, such liquidity is only possible when there is an existence of buyers and sellers in the market. In many Listed Companies large chunk of the paid up capital is held by the promoter group which reduces the public shareholding to a great extent. The promoter group usually refrains from trading in their shares which in turn reduces the number of buyer and sellers in the market and the liquidity factor also gets affected. In order to ensure minimum level of Public Shareholding in Listed Public Companies and to provide liquidity to the investors, Ministry of Finance amended the Securities Contracts (Regulation) Rules, 1957 [SCCR,1957] twice in the year 2010. The press note released by the Ministry of Finance upon the first amendment of SCCR, 1957 stated "A dispersed shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices2".

The amendments made to SCCR, 1957, vide Securities Contracts (Regulation) (Amendment) Rules, 2010, effective from 04.06.2010 and Securities Contracts (Regulation) (Second Amendment) Rules, 2010, effective from 09.08.2010, with respect to increasing the level of public shareholding in Listed Companies, were as follows.

Insertion of following new definitions in Rule 2 of SCCR, 1957

d)

"public" means persons other than –

  1. the promoter and promoter group;
  2. subsidiaries and associates of the company.

Explanation: For the purpose of this clause the words "promoter" and "promoter group" shall have the same meaning as assigned to them under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;

(da)

"public sector company" means a body corporate constituted by an Act of Parliament or any State Legislature and includes a government company:

e)

"public shareholding" means equity shares of the company held by public and shall exclude shares which are held by custodian against depository receipts issued overseas.

Substitution of sub rule (2) (b) under Rule 19 - Requirements with respect to the listing of securities on a recognised stock exchange

b)

  1. At least twenty five per cent. of each class or kind of equity shares or debentures convertible into equity shares issued by the company was offered and allotted to public in terms of an offer document; or
  2. At least ten per cent of each class or kind of equity shares or debentures convertible into equity shares issued by the company was offered and allotted to public in terms of an offer document if the post issue capital of the company calculated at offer price is more than four thousand crore rupees:

Provided further that the company, referred to in sub clause (ii), shall increase its public shareholding to at least twenty five per cent, within a period of three years from the date of listing of the securities, in the manner specified by the Securities and Exchange Board of India.

Insertion of new sub rule (c) in Sub rule 2 of Rule 19

c)

Notwithstanding anything contained in clause (b), a public sector company, shall offer and allot at least ten per cent, of each class or kind of equity shares or debentures convertible into equity shares to public in terms of an offer document.

Substitution of sub rule (4) under Rule 19 -

4)

An application for listing shall be necessary in respect of the following:

  1. all new issues of any class or kind of securities of a company to be offered to the public;
  2. all further issues of any class or kind of securities of a company if such class or kind of securities of the company are already listed on a recognised stock exchange.

Substitution of sub rule (6A) under Rule 19 -

(6A) Except as otherwise provided in these rules or permitted by the Securities and Exchange Board of India under sub-rule (7), all requirements with respect to listing prescribed by these rules shall, so far as they may be, also apply to a public sector company.

Insertion of new rule 19A -Continuous Listing Requirement.

1)

Every listed company other than public sector company shall maintain public shareholding of at least twenty five per cent.:

Provided that any listed company which has public shareholding below twenty five per cent, on the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, shall increase its public shareholding to at least twenty five per cent, within a period of three years from the date of such commencement, in the manner specified by the Securities and Exchange Board of India
.

Explanation: For the purposes of this sub-rule, a company whose securities has been listed pursuant to an offer and allotment made to public in terms of subclause (ii) of clause (b) of sub-rule (2) of rule 19, shall maintain minimum twenty five per cent, public shareholding from the date on which the public shareholding in the company reaches the level of twenty five percent in terms of said sub-clause.

2)

Where the public shareholding in a listed company falls below twenty five per cent at any time, such company shall bring the public shareholding to twenty five per cent within a maximum period of twelve months from the date of such fall in the manner specified by the Securities and Exchange Board of India.

3)

Notwithstanding anything contained in this rule, every listed public sector company shall maintain public shareholding of at least ten per cent.:

Provided that a listed public sector company

  1. which has public shareholding below ten per cent, on the date of commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2010 shall increase its public shareholding to at least ten per cent, in the manner specified by the Securities and Exchange Board of India, within a period of three years from the date of such commencement;
  2. whose public shareholding reduces below ten per cent, after the date of commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2010 shall increase its public shareholding to at least ten per cent, in the manner specified by the Securities and Exchange Board of India, within a period of twelve months from the date of such reduction,.

    In order to comply with amended SCCR, 1957 a time period of three years was given to all listed companies i.e. listed company other than public sector company are supposed to increase public shareholding to at least twenty five per cent by June 2013 and public sector companies are supposed to increase public shareholding to at least ten per cent by August 2013. To facilitate listed entities to comply with minimum public shareholding requirements within the time specified and to incorporate the changes made in SCCRR, 1957 Clause 40A of the Listing agreement was amended. The amended Clause 40A can be read as follows:

    340A. – Minimum level of public shareholding

    1. The issuer company agrees to comply with the requirements specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957.
    2. Where the issuer company is required to achieve the minimum level of public shareholding specified in Rule 19(2)(b) and/or Rule 19A of the Securities Contracts (Regulation) Rules, 1957, it shall adopt any of the following methods to raise the public shareholding to the required level:-

      1. issuance of shares to public through prospectus; or
      2. offer for sale of shares held by promoters to public through prospectus; or
      3. sale of shares held by promoters through the secondary market in terms of SEBI circular CIR/MRD/DP/05/20124 dated February 1, 2012; or
      4. Institutional Placement Programme (IPP) in terms of Chapter VIIIA of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended; or
      5. Rights Issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, whether present or future, that may arise from such issue; or
      6. Bonus Issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, whether present or future, that may arise from such issue; or
      7. any other method as may be approved by SEBI, on a case to case basis.

By making amendments in clause 40A SEBI has made it mandatory for Listed Companies to comply with Rule 19(2)(b) and/or Rule 19A of SCCRR, 1957 and has also given them various options by which they can achieve the required level of public shareholding, including an option to approach SEBI for approval of any other method other then those given in Clause 40A.

CONCLUSION

The amendments in SCCR, 1957 will require the promoters to dilute their shareholding in listed companies and small investors will get an opportunity to buy shares or increase their shareholding in such companies. Also the Continuous Listing requirement for public shareholding will ensure that the level of public shareholding does not falls below the prescribed limits. With the last date for achieving the norms approaching soon there may be huge investment in the Capital Market by the public.

Footnotes

1 Section 2(23A) of Companies Act, 1956

2 Print Release No. BY/GN-182/10 dated 4th June, 2010 by Press Information Bureau, GOI, Ministry of Finance

3 Amended vide Circular No. CIR/CFD/DIL/10/2010 dated 16th December, 2010; CIR/CFD/DIL/1/2012 dated 8th February, 2012; and CIR/CFD/DIL/11/2012 dated 29th August, 2012

4 The guidelines for sale of shares held by promoters through the secondary market issued in SEBI Circular CIR/MRD/ DP/05/2012 were later replaced by Circular No CIR/MRD/DP/ 18 /2012 dated 18th July, 2012

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