The Promoter generally is subjected to various disclosures by regulations of the Securities and Exchange Board of India (“SEBI”). However, when a Promoter is not controlling the affairs of a listed company, then such disclosure requirements is an unwarranted burden on the Promoter. Therefore, to avoid these stricter regulations, he may request for re-classification as public shareholder.
This playbook will discuss the pre-conditions for reclassification, process thereof and the conditions to be followed post reclassification of the Promoter.
This playbook focuses on the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”).
For any discussions, please e-mail srishtiojha@veristlaw.com or sudha.muddaiah@veristlaw.com. And remember this is not formal legal advice!
Key Terms
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1. Pre-conditions for re-classification
1.1 The Promoter/member of Promoter group seeking re-classification and persons in Promoter group should not[1]:
a. together, hold more than 10% of the total voting rights in the listed entity;
b. exercise control over the affairs of the listed entity directly or indirectly;
c. have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements;
d. be represented on the Board (including not having a nominee director) of the listed entity;
e. act as a key managerial person in the listed entity;
f. be a ‘wilful defaulter’ as per the Reserve Bank of India guidelines;
g. be a fugitive economic offender.
1.2 The listed entity should[2]:
a. maintain the public shareholding of at least twenty-five per cent[3];
b. not have trading in its shares suspended by the stock exchanges;
c. not have any outstanding dues to the SEBI, the stock exchanges or the depositories.
2. Process
2.1 At the outset, the Promoter/member of Promoter group makes a request for re-classification to listed entity in addition to providing rationale for seeking re-classification and how conditions are satisfied.[4]
2.2 Within twenty-four hours of receipt of request for re-classification, the listed entity should disclose to the stock exchange the fact of receipt of request for re-classification.[5]
2.3 The Board should analyse the request in next meeting of Board and in any case within three months from date of receipt of request.[6]
2.4 In the meeting, the Board will record its views on the request on analysis thereof.
2.5 The minutes of the Board meeting considering the request along with the views of the Board on it should be disclosed by the listed entity to the stock exchange within twenty-four hours of Board meeting.[7]
2.6 The Board should call the extraordinary general meeting (“EGM”) of the shareholders for approving the request for reclassification by ordinary resolution. The time between the date of meeting of Board and EGM should be at least one month but should not exceed three months.[8]
2.7 In the EGM, the Promoter who had made the request and the persons related to such Promoter cannot vote in relation to this.[9] However, this bar on not participating in voting will not apply in case the Promoter and person related to him do not hold more than one percent of total voting rights in listed entity or when reclassification is pursuant to divorce.[10]
2.8 If the request is approved by ordinary resolution in EGM, the listed entity should submit the application with relevant documents to the stock exchange(s) where its securities are listed within thirty days from date of approval in EGM.[11] Before submitting the application to the stock exchange, the listed entity should ensure that all procedural requirements are followed.
2.9 This fact of submission of application needs to be separately disclosed to the stock exchange within twenty-four hours of submission of application.[12]
2.10 The stock exchange will take decision on the request and in taking such decision, it will satisfy itself that all conditions mentioned in Regulation 31A (3) are followed by the Promoter and listed entity.[13]
2.11 The decision of the stock exchange as communicated to the listed entity should also be disclosed by the listed entity to the stock exchange within twenty-four hours of receipt of the decision.[14]
Note
It is important to note that while the definition of Promoter and Promoter group is different for various purposes, in relation to reclassification, the Regulation 31A includes the shareholders in Promoter group in the definition of the Promoter seeking reclassification. Therefore, the process of re-classification is same for a Promoter and a shareholder in Promoter group.
3. Conditions post re-classification
3.1 A Promoter who has been re-classified as public along with persons in Promoter group shall not at all times[15]:
a. together, hold more than ten percent of the total voting rights in the listed entity;
b. exercise, control over the affairs of the listed entity directly or indirectly; and
c. have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements.
3.2 A Promoter who has been re-classified as public along with persons in Promoter group shall not for a period of not less than three years from date of such re-classification[16]:
a. be represented on the Board (including not having a nominee director) of the listed entity, and
b. act as a key managerial person in the listed entity.
3.3 If above conditions are not followed by the person who has been re-classified from Promoter to public, he will automatically be re-classified as Promoter or person belonging to Promoter group as applicable.
4. Re-classification from public shareholder to Promoter
4.1 Such public shareholder needs to make an open offer as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.[17]
Footnotes:
[1] Regulation 31A(3)(b) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [2] Regulation 31A(3)(c) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [3] Regulation 31A(3)(c) read with Regulation 38 of the LODR and Rule 19A of the SCRA(Rules) 1957. [4] Regulation 31A(3)(a)(i) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [5] Regulation 31A(8)(a) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [6] Regulation 31(A)(8)(a)(ii) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [7] Regulation 31A(8)(b) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [8] Regulation 31(A)(8)(a)(ii) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [9] Regulation 31A(2) and 31A(3)(a)(iii) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [10] Proviso to Regulation 31A(3)(a)(iii) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [11] Regulation 31A(3)(a) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [12] Regulation 31A(8)(c) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [13] Regulation 31A(3) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [14] Regulation 31A(8)(d) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [15] Regulation 31A(4)(a) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [16] Regulation 31A(4)(b) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. [17] Regulation 31A(5) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.