India: SEBI Walks The Talk On Minimum Public Shareholding: Issues Directions Against Promoters And Directors

The Securities and Exchanges Board of India ("SEBI") has vide the order dated June 4, 2013 ("Order") issued directions to the promoters of 105 companies that failed to ensure compliance with the minimum public shareholding requirement under the Securities Contracts Regulations (Rules), 1957 ("SCRR") within the stipulated deadline of June 3, 2013. The defaulting companies include Adani Ports and Special Economic Zones Limited, Tata Teleservices (Maharashtra) Limited, Hindustan Breweries and Bottling Limited, Videocon Industries Limited, Best Eastern Hotels Limited, Chettinad Cement Corporation Limited, Mudra Lifestyle Limited and Omaxe Limited1.

BACKGROUND

The requirement to maintain a minimum public shareholding of 25% of each class or kind of equity shares or convertible debentures issued by a listed company was always provided under Rule 19(2)(b) of SCRR2. Minimum public participation in listed companies has always been advocated by the regulators as this ensures liquidity in the market and discovery of fair price. Further, the availability of requisite floating stock ensures reasonable market depth and reduces susceptibility of listed securities to market manipulation.

In furtherance of the abovementioned objectives, SEBI amended Rule 19(2)(b) of SCRR and added Rule 19(A)3 to the SCRR vide the Securities Contracts (Regulation) (Amendment) Rules, 2010 thereby expressly obligating all listed companies to maintain at all times at least 25% of minimum public shareholding. SEBI also obligated all non-compliant listed companies to increase their public shareholding to 25% by June 3, 2013 through any of the following methods prescribed by SEBI:

1. Issuance of shares to the public through prospectus;

2. Offer of sale of shares held by promoters through prospectus; or,

3. Offer for sale by promoters on the floor of stock exchanges.

4. Institutional Placement Programme ("IPP")

5. Rights issue/bonus issue to public shareholders, with promoters and promoter group shareholders forgoing their rights entitlement/bonus entitlement,

6. Any other method as approved by SEBI on a case to case basis.

Based on the information provided by the National Stock Exchange ("NSE") and the Bombay Stock Exchange ("BSE"), SEBI concluded that 105 companies had failed to achieve the minimum public shareholding requirement by June 3, 2013 as required under the provisions of Regulation 19(2)(b) and Regulation 19(A) of the SCRR. SEBI has attributed the non-compliance to the promoters/ promoter group and directors of such defaulting companies. It is SEBI's view that promoters/ promoter group take advantage of their excess shareholding to the disadvantage of the public shareholders. Further, such non-compliance by some companies puts the promoters/promoter groups of compliant companies at a disadvantageous position in comparison to the promoters/ promoter group of the non-compliant companies.

ORDER

In view of the situation prevailing in the specified list of companies, SEBI with a view to restore the balance between public and non-public shareholding and eliminating the disproportionate advantage arising out of the non-compliance, directed the following actions, pending final order:

1. Voting rights and corporate benefits like dividend, bonus shares, split, etc. in respect of the excess of the proportionate promoter/promoter group shareholding shall be frozen till compliance with the minimum public shareholding requirement has been achieved.

The maximum promoter shareholding permitted under SCRR is three times the minimum public shareholding, i.e. 75:25 or in a 3:1 ratio. If the public shareholding in a listed company is 10%, the promoter holding shall be impliedly three times the existing public shareholding i.e, 30%. The implication of the order is that the promoters or members of the promoter group shall not be able to exercise voting rights or claim dividend on the excess 60% of their shareholding in the listed company, until the minimum public shareholding requirement has been complied with.

In case of more than one entity in the promoter/promoter group in a company, the excess promoter holding for the purpose of taking action shall be computed on a proportionate basis. For illustrating the above, if there are three promoters; A, B and C with shareholdings of 45%, 35% and 10% respectively, the excess promoter holding of 60% shall be allocated as follows:

Thus, Promoters A, B and C shall not be able to exercise voting rights or claim dividend over 30%, 23.33% and 6.67% respectively of their shareholding in the non-compliant company.

2. The promoters/promoter group and directors of non-compliant companies are prohibited from dealing in securities of such companies, whether directly or indirectly, except for the purpose of complying with the minimum public shareholding requirement, till such time these companies comply with the minimum public shareholding requirement.

Essentially, SEBI has not imposed a blanket ban on trade of securities by promoters/ promoter group so long as such trade is meant to comply with the minimum public shareholding requirement.

3. The shareholders forming part of the promoter/ promoter group and directors of non-compliant companies are restrained from holding any new position as director in any listed company, till the minimum public shareholding requirements have been complied with.

It is noteworthy here that not only has SEBI restricted the promoter/ promoter group/ directors from holding new positions in the non-compliant companies, but the Order extends far enough to apply to any company listed on any stock exchanges in India.

SEBI has specifically clarified that the Order is without prejudice to its right to take any other action against the promoters of non-compliant companies including the following:

1. Levying monetary penalties under adjudication proceedings;

2. Initiating criminal proceedings;

3. Moving scrip to trade-to-trade segment; and

4. Excluding scrip from F&O segment.

The board/ audit committees of the non-complaint companies shall be required to submit a compliance report to the stock exchanges on which it is listed, detailing the extent to which compliance has been achieved and the efforts taken in that regard.

The Order also permits the promoters of defaulting companies to file a reply within 21 days of the order or seek personal appearance before SEBI.

ANALYSIS

SEBI's ultimatum to increase public shareholding to requisite level by June 3, 2013 had startled the promoters of non-compliant companies who were enjoying the benefits of excess shareholding till then. There were complaints that the time frame available was too short for offloading promoter shareholding especially because dilution could be done only through one of the modes prescribed by SEBI and the market was facing severe liquidity crunch. While promoters of some of the non-compliant companies made representations requesting SEBI to take a lenient view and extend the dead line for compliance, the promoters of other non-compliant companies initiated steps to ensure compliance before the deadline. The Indian market has thus far witnessed 44 offers for sale and 8 IPPs worth USD 9 billion in order to comply with the guidelines.4.

Footnotes

1. Exhaustive list of the companies in default is included in the SEBI order that can be accessed here

2. Rule 19(2)(b) of SCRR:
(i) 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

(ii) 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 that the requirement of post issue capital being more than four thousand crore rupees shall not apply to a company whose draft offer document is pending with the Securities and Exchange Board of India on or before the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, if it satisfies the conditions prescribed in clause (b) of sub-rule 2 of rule 19 of the Securities Contracts (Regulation) Rules, 1956 as existed prior to the date of such commencement:

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.

3. Rules 19(A) of SCRR:
(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 sub-clause (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-
(a) 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;
(b) 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.

4. "http://profit.ndtv.com/news/corporates/article-87-companies-yet-to-meet-sebi-norms-on-minimum-public-shareholding-322661"

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Nikhil Joseph
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