Issues in reclassification of listed companies’ promoters

In India, a promoter is generally understood as a person in control of a company. A change in the promoter of a listed company is perceived as sufficiently significant to affect the company’s share price.

Consequently, the Securities and Exchange Board of India (SEBI) subjects promoters to stringent disclosure requirements and a high degree of accountability. Further, SEBI has recently mandated stock exchanges to freeze all promoter holdings in certain cases of non-compliance by listed companies.

It is for this reason that persons identified as promoters under law (because they are named as such in the prospectus or the offer document) but no longer in control of the company and who have transferred all or almost all of their shareholding in the company often wish to rid themselves of the “promoter” tag. However, a person does not cease to be a promoter of a company merely by ceasing to be in control of the company or by transferring all of its shares. This is a matter of particular concern for financial investors in listed companies.

In September 2015, SEBI, following recommendations of its Primary Market Advisory Committee, implemented its framework for reclassification of promoters of listed companies as public shareholders under regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.