Last year, SEBI proposed new norms to allow reclassification of promoters through a discussion paper on the subject. The framework policy lays down the pillars on which the new legislation will find its bearing; although it’s yet to be formulated.

Under the present applicable Indian securities laws/ regulations, every listed company is expected to maintain a minimum “public shareholding” of at-least 25% (twenty five per cent). If at any time the public shareholding of a listed company falls below 25%, such a company is required to bring the public shareholding back to 25% within the prescribed time. This 25% threshold for public shareholding was brought in by the government in 2010, prior to which the threshold for public shareholding was 10%. The intended objective behind this amendment to the Rules was to have significant public float to prevent the concentration of shares in the hands of a few market players and prevention of market manipulation.

Under the Indian securities laws, the term “Promoter” is defined to include, inter-alia, person(s), who are in either, (a) control of the issuer company; or (b) who are instrumental in the formulation of the plan for the offer; or (c) who are named as such in an offer document. The current law does not provide for a process for reclassification of promoters of listed companies as public shareholders under any circumstances and this leads to a situation of once a promoter always a promoter. This is counterproductive for the promoters who have sold their significant shareholding in a company and also ceases to have any control in such company; but owing to requirements of laws, they were still continued to be named as promoters.

Without going into a granular analysis of the proposed policy framework, the discussion paper looks at three main scenarios by which a promoter of a listed company may reclassify itself to public (and thereby its shareholding to a public or non-promoter shareholding) by an open offer or by execution of a registered separation agreement or disclosure of the material terms of the separation agreement to stock exchanges prior to reclassification. Reclassification may also be done by lowering of the promoter shareholding to less than 5% (including convertibles) in the company.

The discussion paper proposes various conditions that will need to be adhered for reclassification of the promoter to public. These conditions include the following:

• post reclassification no shareholding agreement will exist and all past agreements between the outgoing promoter and the continuing promoter will be made null and void. The outgoing entities will only have such rights as any other public shareholder;
• the outgoing entities cannot hold any key management personnel (KMP) position in the company and the other group or associate firms. In case the promoter is a corporate entity, KMPs of such a corporate promoter cannot hold any KMP position in the company and the other group companies;
• the outgoing entities should not be barred from accessing the capital market. Such outgoing entities will not exercise, directly or indirectly, any control over the affairs of the company or any if the group/ associate companies;
• if such outgoing entities want to classify themselves as promoters again in the future, they will be required to make an open offer again in the future, they will be required to make an open offer to the public and would not be eligible for exemption from the said obligation;
• if the reclassification is not done through an open offer, the promoter entity or the company will be first required to intimate the stock exchanges about the reclassification and its reasons, shareholding of the said promoter group, copy of agreements and other relevant documents. In such cases the reclassification will be allowed only after one year from the date of intimation. However, they will not be considered to be part of public shareholders for another three years for the purpose of compliance with minimum public shareholding requirements;
• if the reclassification is done by lowering the overall promoter holding to less than 5%, such promoters should have completed at least three financial years as promoters of the firm prior to the year in which the said promoter desires to re-classify its holding as public.

Public comments on the discussion paper were sought by January 16, 2015. The discussion paper seems to be in a very positive direction insofar as the change in law for reclassification of promoters to public category is concerned. We await final regulations in place in this regard.