RECLASSIFICATION OF PROMOTERS

[Mr. M. GOVINDARAJAN]

Consultation paper on reclassification

The topic of promoter reclassification has been a talking point since 2015, wherein the power to reclassify promoters laid in the hands of the company, rather than the promoter. Therefore, it was observed by SEBI that the process provided too wide a net to alter the tag of a ‘promoter’. Hence, in 2018, SEBI revamped the procedure and came out with the now inserted Regulation 31A of Listing Obligations and Disclosure Requirements Regulations, 2015.

Promoters

The term ‘promoter’ is defined under Regulation 2 (1) (oo) as including a person-

• who has been named as such in a draft offer document or offer document or is identified by the issuer in the annual return; or
• who has control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or otherwise; or
•  in accordance with whose advice, directions or instructions the board of directors of the issuer is accustomed to act.  This shall not  apply to a person who is acting merely in a professional capacity.

A financial institution, scheduled commercial bank, foreign portfolio investor other than individuals, corporate bodies and family offices, mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor, insurance company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be a promoter merely by virtue of the fact that 20% or more of the equity share capital of the issuer is held by such person unless such person satisfy other requirements prescribed under these regulations.

Promoter group

Regulation 2(1)(pp) defines the expression ‘promoter group’ as including-

• 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;
• anybody corporate in which the promoter holds 20% or more of the equity share capital; and/or anybody corporate which holds twenty per cent. or more of the equity share capital of the promoter;

•  in case the promoter is an individual-

•  anybody corporate in which 20% 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 their relative is a member;
•  anybody corporate in which a body corporate as provided in (A) above holds 20% or more, of the equity share capital; and
• any Hindu Undivided Family or firm in which the aggregate share of the promoter and their relatives is equal to or more than 20% of the total capital;

• all persons whose shareholding is aggregated under the heading "shareholding of the promoter group.

Reclassification of promoters

Every company has its own promoters.  They may be the promoters from the incorporation of Company to winding up of Company.  Other shareholders are public shareholders in case of public limited company.   The share holders of a listed company may want to change their status from ‘promoter to public’ and vice versa one or for other reason.

The ‘promoter(s) seeking re-classification’ shall mean all such promoters/persons belonging to the promoter group seeking re-classification of status as public.  ‘persons related to the promoter(s) seeking re-classification’ shall mean such persons with respect to that promoter(s) seeking re-classification who fall under sub-clauses (ii), (iii) and (iv) of clause (pp) of sub-regulation (1) of regulation 2 of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Reclassification of promoters to public

In this case the existing promoters may want to be classified as public.  The reasons and procedure for this reclassification is discussed as below.

Reasons for reclassification

The SEBI Takeover Code and Insider Trading Regulation requires the promoter to comply with various transitional, event based, annual an pledge disclosures with target company and stock exchanges including dealings restrictions during the period if disclosure of trading window.  Therefore the promoters need to comply with various regulations.  Even in some cases they may not control the affairs of the company or sell majority of its shares or has no direct and indirect relationship with the company.  This requires reclassification from promoter to public so as to avoid compliances applicable to promoters and promoter groups.

The family dispute between the promoters, divorce between husband and wife who are promoters are also the reasons for reclassification of promoters.

Permission by stock exchange

The re-classification of any of the above types can be done only with the permission with the stock exchanges in which the shares are listed.    In case of entities listed on more than one stock exchange, the concerned stock exchanges shall jointly decide on the reclassification.

Who can apply?

 The promoter(s) and persons related to the promoter(s) may seek for reclassification.  According to Regulation 31A (3)(b) they shall not-

• together, hold more than ten percent of the total voting rights in the listed entity;
• exercise control over the affairs of the listed entity directly or indirectly;
•  have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements;
• be represented on the board of directors (including not having a nominee director) of the listed entity;
•  act as a key managerial person in the listed entity;
• be a ‘willful defaulter’ as per the Reserve Bank of India Guidelines;
• be a fugitive economic offender.

Conditions

The approval of the application for reclassification is subject to the following conditions-

• The listed entity should be compliant with Minimum Public Shareholding (MPS) requirement as prescribed under Regulation 38 and trading in shares should not have been suspended.
• There should be no outstanding dues against the company which is either payable to SEBI, Exchanges or Depositories.
• Those seeking reclassification shall not be represented on the board of directors (including as a nominee director) and shall not act as Key Managerial Person in the listed entity for a period of 3 years from the date of such re-classification.

Upon failure to comply with above continuous requirements, the outgoing promoter shall automatically be reclassified as promoter/ persons belonging to promoter group, as applicable.

Procedure

• The promoters seeking reclassification shall file an application to its listed company.  In the application the rationale for reclassification is to be mentioned and the application is satisfied the conditions specified in Regulation 31A(3)(b) along with the reclassification fee.
• Intimation to the stock exchange in this regard by the company within 24 hours of the receipt of the application.
• The Board of Directors shall analyze such request in the immediate Board Meeting or within 3 months from the date of request whichever is earlier.
• The minutes of the Board meeting shall be submitted to the stock exchange within 24 hours of the conclusion of the Board meeting in which reclassification is approved.
• The views of the Board in this regard are placed before the general meeting for the approval of the shareholders.
• The time gap between the Board meeting and the general meeting shall be at least one month but not exceeding 3 months.
• The request of the promoters for reclassification shall be approved by an ordinary resolution in the general meeting.  The promoters who seek reclassification shall not vote to approve such reclassification.
• The outcome of the general meeting is required to submit to stock exchange as applicable to General Meetings.  But this procedure is not applicable in cases-

• where the promoter(s) seeking reclassification and persons related to the promoter(s) seeking reclassification, together, do not hold more than one percent of the total voting rights in the listed entity;
• where reclassification is pursuant to a divorce.

• The Company will submit the application to the Stock Exchange within 30 days from the date of approval of shareholders in general meeting.  If the approval of general meeting is not required the application is to be sent to stock exchange within 30 days from the date of board meeting in which the reclassification is approved.
• The Company is to give information to the Stock Exchange within 24 hours of the filing such application with stock exchange.
• The Stock Exchange shall process the application and ensure that the application is in compliance in all respects. 
• In case of incomplete applications, company shall be provided opportunity to rectify the deficiencies.  If the deficiencies are not rectified within 30 days of intimation of the same to the Company, the application shall be liable to be rejected and the processing fee paid by the company will be forfeited.
• The Letter of acceptance shall be issued to the company by the Exchange to effect the reclassification in the shareholding pattern subject to compliance with applicable SEBI regulations.
• The approval/rejection of the application is to be disclosed to the Stock Exchange as material event within 24 hours of communication of decision of Stock Exchange.

After reclassification

Regulation 31A (4) provides that the promoter(s) seeking re-classification, subsequent to re-classification as public, shall comply with the following conditions-

• he/she shall continue to comply with conditions mentioned below-

• shall not together, hold more than ten percent of the total voting rights in the listed entity;
• shall not exercise control over the affairs of the listed entity directly or indirectly; and
• shall not have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements;

at all times from the date of such re-classification failing which, he/she shall automatically be reclassified as promoter/ persons belonging to promoter group, as applicable;

• he /she shall comply with conditions mentioned below-

• shall not be represented on the board of directors (including not having a nominee director) of the listed entity; and
•  act as a key managerial person in the listed entity;

for a period of not less than 3 years from the date of such re-classification failing which, he /she shall automatically be reclassified as promoter/ persons belonging to promoter group, as applicable.

Public shareholder wants to be a promoter

If any public shareholder seeks to reclassify itself as promoter, it shall be required to make an open offer in accordance with the provisions of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.   No separate application needs to be done to the Exchange for this purpose; however intimation of the same may be provided to the Stock Exchange.

The company should submit reclassification application along with supporting documents to the Exchange within 30 days of conclusion of shareholder’s meeting.

In case of reclassification pursuant to an open offer or a scheme of arrangement, the following shall not apply if the intent of the erstwhile promoter(s) to reclassify has been disclosed in the letter of offer or scheme of arrangement-

• an application for reclassification has been made by the listed entity to the stock exchanges within thirty days from the date of approval by shareholders in general meeting after ensuring that the following procedural requirements have been fulfilled:

• the promoter(s) seeking reclassification has made a request for reclassification to the listed entity along with a rationale for the same and a description as to how the conditions specified in clause (b) of sub-regulation (3) of this regulation are satisfied; (Reg. 31A(3)(i)
•  the board of directors of the listed entity has analyzed such request in the immediately next board meeting or within three months from the date of receipt of the request from its promoter(s), whichever is earlier and has placed the same before the shareholders in a general meeting for approval along with the views of the board of directors on the request.

 There shall be a time gap of at least one month but not exceeding three months between the dates of the board meeting and the shareholders’ meeting considering the request of the promoter(s) seeking reclassification; Reg. 31A(3)(ii)

• the request of the promoter(s) seeking reclassification has been approved in the general meeting by an ordinary resolution in which the promoter(s) seeking reclassification and the persons related to him/her/it have not voted to approve such reclassification request:

The above shall not be applicable in cases-           

• where the promoter(s) seeking reclassification and persons related to the promoter(s) seeking reclassification, together, do not hold more than one percent of the total voting rights in the listed entity;
• where reclassification is pursuant to a divorce. Reg.31A(3)(iii)

• The following events shall deemed to be material events and shall be disclosed by the listed entity to the stock exchanges as soon as reasonably possible and not later than 24 hours from the occurrence of the event-

• receipt of request for re-classification by the listed entity from the promoter(s) seeking re-classification;Reg.31A(8)(a)
• minutes of the board meeting considering such request which would include the views of the board on the request.Reg.31A(8)(b)

Reclassification in Insolvency

The provisions of sub-regulations (3), (4) and clauses (a) and (b) of sub-regulation (8) of this regulation shall not apply if reclassification of promoter(s) is as per the resolution plan approved under section 31 of the Insolvency Code or pursuant to an order of a Regulator under any law subject to the condition that such promoter(s) seeking reclassification shall not remain in control of the listed entity.