Shareholders in a listed company are classified under two broad categories, i.e. those that belong to the promoter / promoter group and those shareholders who are members of the public with no family or formal business ties with the promoter / promoter group. SEBI vide Regulation 31A under Chapter IV of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations 2015”) has allowed the reclassification of a shareholder from promoter category to public category and vice versa. The Regulation 31A requires shareholders’ approval for reclassification of a promoter as public shareholder, except in case of acquisition of the promoter’s stake through transmission/succession/inheritance. However recently M/s. Alembic Pharmaceuticals Limited has sought guidance from SEBI under the SEBI (Informal Guidance) Scheme, 2003 wherein SEBI has taken a view that the company may not be required to obtain approval of the shareholders for the proposed reclassification.
To analyse the subject, it would be necessary to understand the term ‘Promoter’, ‘Promoter Group’ stipulated under Regulation 2 (1) (za) and Regulation 2 (1) (zb) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 respectively and the spirit of Regulation 31A of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
‘Promoter’ and ‘Promoter Group’
- person/s who are in control of the issuer;
- person/s who are instrumental in the formulation of a plan or programme pursuant to which specified securities are offered to public;
- person/s named in the offer document as promoters:
If a director or officer of the issuer or a person, is acting as such merely in his professional capacity, shall not be treated as promoter.
“promoter group” includes:
- the promoter;
- an immediate relative of the promoter (i.e. any spouse of that person or any parent, brother, sister or child of the person or of the spouse); and
- in case promoter is a body corporate:
- a subsidiary or holding company of such body corporate;
- any body corporate in which the promoter holds 10% or more of the equity share capital or which holds 10% of the equity share capital of the promoter;
- anybody corporate in which a group of individuals or companies or combinations thereof which hold 20% or more of the equity share capital in that body corporate also holds 20% or more of the equity share capital of the issuer; and
- in case the promoter is an individual:
- anybody corporate in which 10% or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of his immediate relative is a member;
- anybody corporate in which a body corporate referred in (A) above holds 10% or more, of the equity share capital;
- any Hindu Undivided Family or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than 10% of the total; and
- all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus under the heading “shareholding of the promoter group”
It is to note that a financial institution, scheduled bank, foreign institutional investor and mutual fund shall not be deemed to be a Promoter / Promoter Group merely by holding 10% or more of the equity share capital of the issuer. However, they would be treated as Promoter / Promoter Group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them;
Regulation 31A of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
A promoter’s shareholding may be reclassified and can become public shareholding in three situations, i.e. (a) when there is a change in the promoter subsequent to an open offer or in any other manner pursuant to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; or (b) due to transmission /succession/inheritance; or (c) when a company becomes professionally managed with no identifiable promoter.
In case of reclassification of promoter’s stake into public under (a) and (c) above, following conditions are required to be followed:
- Approval of Shareholders to be obtained in General Meeting
- Any special rights held by the promoter through any formal or informal arrangement or any shareholder agreement shall be discontinued
- If the shareholder’s resolution has authorised the promoter or his relative to act as a Key Managerial Personnel (KMP) of the entity, pursuant to the provisions of the Companies Act, 2013, the appointment will be maximum up to 3 years from the date of resolution.
In case of (a) above, a promoter can hold maximum upto 10% of paid up equity capital of the entity alongwith Promoter Group /Persons in concert (PAC), after reclassification as public shareholder.
In case of (c) above, a promoter can hold maximum upto 1% of paid up equity capital of the entity alongwith Promoter Group /Persons in concert (PAC), after reclassification as public shareholder, including any holding of convertibles/outstanding warrants/Depository Receipts. However, any mutual fund, bank, insurance company, financial institution, foreign portfolio investor may individually hold up to 10% paid-up equity capital of the entity including any holding of convertibles/outstanding warrants/Depository Receipts.
Other conditions for promoter undergoing reclassification due to change of promoter or due to company becoming professionally managed.
- Promoter will have no direct or indirect control over company’s affairs
- Increase in the level of public shareholding due to this reclassification will not be counted for fulfilling 25% minimum public shareholding criteria prescribed under Rule 19A of the Securities Contracts (Regulation) Rules, 1957.
- Intimation to Stock Exchange is required to be given about the reclassification, being material event.
The Regulation also empowers SEBI to relax any of the above condition if it is satisfied that outgoing promoter or PAC will not be exercising any control over the entity.
Waiver to Alembic Pharmaceuticals from Shareholders’ approval
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