2013 (12) TMI 584 - AT - Companies Law

Minimum public shareholding requirement of 25 per cent to be maintained - Continuous listing requirement - Rule 19A of the Securities Contracts (Regulation) Rules, 1957, r.w. regulation 10 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 - Held that - Appellant made an application proposing a method to attain mandatory requirement of minimum public shareholding of 25 per cent in all listed companies, as current public shareholding of appellant was 11.2 per cent, which was significantly below prescribed 25 per cent limit SEBI Rejected the method adopted by the appellant - the Appellant seems to have overlooked the fact that the underlying philosophy behind the requirement of a minimum public holding of 25% is prevention of concentration of shares in the hands of a few market players by ensuring a sound and healthy public float to stave off any manipulation or perpetration of other unethical activities in the securities market which would unfortunately be the irrefragable consequence of the reins of the market being in the hands of a few. The appellant intended to violate law by raising shareholding of P&G Group substantially beyond 75 per cent benchmark and thereafter by relegating Poddar Group to ostensible stature of a public shareholder and once appellant had intentionally broken law, P&G Group proposed to offer an insignificant 4.9 of their shares to public - The Appellant does not comply with the requirement of 25% of public shareholding by adopting a simple and straight forward approach and offering the shortfall in 25% public shareholding to the public through one of the methods elucidated by SEBI - The appellant should comply with requirement of 25 per cent of public shareholding by adopting a simple and straight forward approach and offering shortfall in 25 per cent public shareholding to public through one of methods elucidated by SEBI, or which gets approval of SEBI Decided against Appellant.

Issues Involved
1. Compliance with the minimum public shareholding requirement of 25% as per SCRR.
2. Legality and acceptance of the method proposed by the Appellant to achieve the minimum public shareholding.
3. Interpretation of the term 'public shareholder' and the reclassification of the Poddar Group.
4. SEBI's discretion in approving methods for achieving minimum public shareholding.
5. Timeliness and delay in proposing a method to achieve the minimum public shareholding.

Detailed Analysis

1. Compliance with the Minimum Public Shareholding Requirement of 25% as per SCRR:
The core issue revolves around the Appellant's non-compliance with the mandatory minimum public shareholding requirement of 25% as stipulated under Rule 19A(1) of the Securities Contracts (Regulation) Rules, 1957 (SCRR). The Appellant's current public shareholding stands at 11.2%, significantly below the prescribed limit. The requirement aims to ensure a dispersed shareholding structure to provide liquidity to investors and prevent price manipulation.

2. Legality and Acceptance of the Method Proposed by the Appellant to Achieve the Minimum Public Shareholding:
The Appellant proposed a method involving the transfer of 4% of shares from the Poddar Group to the P&G Group, followed by the reclassification of the Poddar Group as a public shareholder. The Appellant contended that this method was in line with the SEBI Circular dated August 29, 2012, which allows listed companies to seek approval for any method to achieve the 25% threshold. However, SEBI rejected this method, stating that it does not involve any offer or allotment of shares to the public shareholders, thereby not meeting the objective of increasing public float and avoiding the concentration of stock in the hands of a few persons.

3. Interpretation of the Term 'Public Shareholder' and the Reclassification of the Poddar Group:
The Appellant argued that the reclassification of the Poddar Group as a public shareholder was not merely a change in nomenclature but a factual change in status, as the Poddar Group would lose all special rights and control over the Appellant. The Appellant cited instances where shareholders holding more than 10% voting rights had been classified as public shareholders. However, SEBI maintained that the proposed reclassification was contrary to the spirit of Rule 19A(1) and would not lead to a dispersed shareholding structure essential for market integrity.

4. SEBI's Discretion in Approving Methods for Achieving Minimum Public Shareholding:
The Tribunal emphasized that SEBI has the discretion to approve or reject any new proposal put forth by a listed company on a case-to-case basis, as per the Circular dated August 29, 2012. SEBI's rejection of the Appellant's proposal was based on the rationale that the method did not align with the underlying philosophy of maintaining a strong public participation in the shareholding of listed companies to prevent market manipulation.

5. Timeliness and Delay in Proposing a Method to Achieve the Minimum Public Shareholding:
The Tribunal noted the delay on the part of the Appellant in proposing a method to achieve the minimum public shareholding. The first amendment to the SCRR was made on June 4, 2010, and the Appellant waited for more than two years to present its scheme. The Appellant argued that it was within its right to make the application within the three-year period provided and attributed the delay to SEBI's issuance of circulars every six months. However, the Tribunal found that the Appellant should have acted proactively and responsibly to comply with the law and that SEBI's actions were aimed at facilitating listed companies in achieving the prescribed public shareholding.

Conclusion
The Tribunal upheld SEBI's impugned order and dismissed the appeal, stating that the Appellant's proposed method was against the spirit of the law and did not ensure a dispersed shareholding structure. The Tribunal emphasized the importance of maintaining a healthy public float to prevent market manipulation and ensure liquidity for investors. The appeal was found to be devoid of merit, and the interim relief granted earlier was vacated.

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