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TMI Blog2013 (12) TMI 584X X X X Extracts X X X X X X X X Extracts X X X X ..... oting rights. 3. Brief facts leading up to the dispute are that the Appellant is a public company with shares listed on the Bombay Stock Exchange Limited ("BSE") and the National Stock Exchange of India Limited ("NSE"). The Appellant, jointly promoted by the Poddar Group ("Poddar Group") and the Procter and Gamble Group ("P&G Group") who are parties to a Shareholders' Agreement dated July 10, 1996 ("SHA"), made an Application dated October 10, 2012 to Respondent No. 1 under paragraph 3 of Circular dated August 29, 2012 proposing a method to attain the mandatory requirement of minimum public shareholding of 25% in all listed companies, as the current public shareholding of the Appellant is 11.2%, which is significantly below the prescribed 25% limit. 4. As of today, the respective shareholdings of the Poddar Group and the P&G Group stand at 12.9% and 75.9%. The manner in which to achieve the required public shareholding as presented by the Appellant in the Application, in brief, is that the Poddar Group would first transfer 4% of its shares to the P&G Group, which being an inter-se transfer of shares held by the Poddar Group for around 16 years would be exempt from the obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided for in the Circular in question. 8. The Appellant submits that the classification of the Poddar Group as a public shareholder, as part of the proposed transaction, is not merely a change in nomenclature but a change in the status of the Poddar Group as is evidenced by the loss of all special and extraordinary rights and obligations regarding sale of shares held in the equity share capital of the Appellant. As submitted by the Appellant hereinabove such inter-se transfer of shares between the Poddar Group and P&G Group is exempt from any obligation of an open offer under Regulation 10(1)(a)(ii) of the SAST Regulations, 2011. It is also stated that nowhere in the SEBI Act, or under rules and regulations framed by the SEBI it is provided that once a shareholder is classified as a promoter, it must remain one for all times to come inspite of a factual change in its status. 9. The Appellant further submits that once the proposed transaction is complete the Poddar Group will hold 8.9% shares in the Appellant, which, as per the Appellant, is akin to the shareholding of an ordinary shareholder. The Appellant has provided a list of instances wherein even shareholders holding more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll maintain public shareholding of at least twenty five per cent: Provided that any listed company which has public shareholding below twenty five per cent on the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, shall increase its public shareholding to at least twenty five per cent within a period of three years from the date of such commencement, in the manner specified by the Securities and Exchange Board of India. Explanation.- For the purposes of this sub-rule, a company whose securities has been listed pursuant to an offer and allotment made to public in terms of sub-clause (ii) of clause (b) of sub-rule (2) of rule 19, shall maintain minimum twenty five per cent public shareholding from the date on which the public shareholding in the company reaches the level of twenty five per cent in terms of said sub-clause." 12. Further, clause 40A of the listing agreement entered into between a particular company and the concerned stock exchange vests a legal obligation in listed companies to compulsorily comply with initial as well as continuous listing requirements with respect to public shareholding a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds to achieve the mandatory threshold for all companies listed on recognized stock exchanges. 16. It may be noted that vide Circular dated August 29, 2012, the Respondent No. 1 offered to consider any method, other than the ones specifically provided for in various preceding circulars so that a company would come up with an acceptable way to fulfil the required criterion of minimum public shareholding without trying to circumvent the law in any way. 17. The Respondent No. 1 submits that the object of Rule 19A(1) of the SCRR is to compulsorily bring about increase in public shareholding of listed companies and the circulars issued by the Respondent No. 1 only supplement the rule, they should, thus, be read harmoniously with Rule19A(1). It is stated that the said rule grants the Respondent No. 1 the discretion to decide whether or not to accept the method put forth by any listed company as per circular dated August 29, 2012. The Respondent No. 1 submits that the proposal of the Appellant as stated in the application dated November 10, 2012 made to the Respondent No. 1 does not take into account the philosophy behind Rule 19A(1), viz., that of maintaining a strong participation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10, altering Rule 19(2)(b) and inserting a new rule, viz., Rule 19(A). This amendment in effect provided that all listed companies would need to maintain a consistent public shareholding of 25% and those listed companies whose public shareholding was below the 25% benchmark were directed to satisfy the requirement within a period of three years from June 4, 2010, i.e., the day on which the SCRR was first amended with respect to the minimum public shareholding. 21. On December 16, 2010, SEBI issued a Circular amending Clause 40A of the Listing Agreement to provide for the manner which could be adopted by companies to increase their public shareholding to the mandatory requirement of 25%. The Circular provided for the following methods :- (i) Issuance of shares to the public through prospectus; (ii) Offer for sale of shares held by promoters to public through prospectus; (iii) Sale of shares held by promoters through the secondary market i.e. OFS through Stock Exchange. 22. Following the said development, and Circular dated February 8, 2012 enabling listed companies to attain the minimum public shareholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the promoters' shareholding as possible. Further, in relation to the rationale behind inclusion of Rule 19A in the SCRR, a Press Release dated June 4, 2010, issued by the Finance Ministry, following the introduction of Rule 19A, is relevant and reproduced hereinbelow :- "A dispersed shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices. Further, the larger the number of shareholders, the less is the scope for price manipulation." 26. It is, thus, noteworthy that the Appellant intends to achieve the minimum public shareholding requirement of 25% by first taking the shareholding of the P&G Group, which already stands at 75.9%, i.e., beyond the prescribed promoter shareholding, further up to 79.9% which would be the result of the Poddar Group transferring 4% of their shareholding to the P&G Group and would be ex-facie in breach of law. In effect, the Appellant intends to first violate the law by raising the shareholding of the P&G Group substantially beyond the 75% benchmark and thereafter by relegating the Poddar Group to the ostensible statur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oing everything possible to work in consonance with the law to protect the interests of the market. Similarly, regarding the submission about the supposed delay caused by SEBI's actions, we find that the Respondent No. 1 was not enjoined by law to issue one circular after another prescribing ways and means which could be resorted to by listed companies to comply with the amendments in the SCRR. The Respondent No. 1 did so with the laudable purpose of ensuring fairness in the market by providing listed companies with as many techniques as possible to honorably raise their public shareholding up to the requisite benchmark. When the Appellant itself waited till the fag end of the window period of 3 years provided to listed companies to ensure adherence with the Regulation in question, the Appellant is precluded from turning around and pointing fingers at SEBI for trying feverishly to facilitate listed companies in their endeavor to achieve the prescribed minimum public shareholding of 25%. SEBI was under no obligation to issue repeated circulars prescribing method after method which could be adopted to achieve the aforesaid goal, but it did so to help listed corporates embark upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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