The Ministry of Finance has recently made two amendments to the Securities Contracts (Regulation) Rules, 1957, that introduce mandatory requirements for minimum public shareholding in listed companies. While the first amendment, dated 4 June, required all listed companies to maintain minimum 25% public shareholding, the second, dated 9 August, relaxed this norm for public sector companies which are required to have at least 10% public shareholding.
Listed companies not having 25% public shareholding as on the date of the first amendment are required to raise their public shareholding to reach the prescribed 25% level within three years. Further, companies falling below the 25% level at any time after the date of the first amendment are required to correct the shortfall within 12 months. While the amendments have the laudable objective of reducing market manipulation by promoters and improving corporate governance norms, they need a thorough reexamination as several concerns need to be addressed.
The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations) require a three-year lock-in on minimum promoters’ contribution and a one-year lock-in on promoters’ shareholding above such minimum contribution. Hence, promoters of a newly listed company cannot sell any shares for at least one year from the date of allotment in an initial public offering. Further, under the ICDR Regulations, a newly listed company cannot even use the qualified institutional placement route for one year if it needs to raise its public shareholding. Given the stringent three-year timeline, these restrictions will prove burdensome for newly listed companies looking to comply with the amendments.
The meaning and scope of “public shareholding” under the amendments is ambiguous and needs clarifications on several fronts. The term “public” has been defined to mean persons other than promoter and promoter group and associates or subsidiaries of the company. A promoter as defined in the ICDR Regulations includes a person who is in control of the issuer company. However, the meaning of the term “control” itself is a major grey area. The recent judgment of the Securities Appellate Tribunal in Subhkam Ventures, which holds that veto rights of an investor would not amount to “control”, is up for appeal in the Supreme Court. The term “associates” has not been defined in the amendments and this adds further uncertainty.
It also appears from a strict reading of the amendments that private equity investors and qualified institutional buyers (QIBs) who have invested in the company prior to an initial public offering may have to be excluded while computing public shareholding. Private equity players and QIBs do not offer shares in terms of an “offer document” as required under the amendments. In companies that have significant private equity and QIB shareholding, the promoters’ shareholding would stand diluted to negligible levels after compliance with the amendments.
Crucially, shares held by a custodian against depository receipts (DRs) issued overseas have been excluded from the ambit of “public shareholding”. This will adversely affect companies which have considerable shareholding in the form of American depository receipts and global depository receipts. It is suggested that DRs, which carry rights similar to those of ordinary shares, like voting rights, dividend rights and pre-emption rights, should be considered for the purpose of calculation of public float. As such, DRs are not in any way controlled by promoters.
On a more practical note, cash rich companies would not be able to show appropriate use of public offer proceeds and hence may find it difficult to tap the primary route. Sick companies would also face difficulty in complying with the amendments as there would be few takers for their shares. Retail participation in recent disinvestments has been tepid and this raises the questions about the market’s ability to absorb a large number of public issues within a short time span.
The increase in public shareholding is required to be carried out in the manner specified by SEBI. It is suggested that additional avenues for raising public shareholding be expressly permitted by SEBI. This could include an offer for sale by promoters in a qualified institutional placement, selective reduction of promoter shareholding under a court scheme, a rights issue where promoters undertake not to subscribe to any shares, etc.
Companies that are not able to comply with the amendments for reasons beyond their control should be given more time to do so as permitted under the existing listing agreement. Further, penalties such as delisting for non–compliance should not be resorted to as it would defeat the basic purpose behind the amendments, i.e., to ensure greater public access to the stock of listed companies.
Rudra Kumar Pandey is a senior associate and Siladitya Chatterjee is an associate at Amarchand Mangaldas & Suresh A Shroff Co. The views expressed are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas.
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