[Note: Author and Contributor of this blog post is Risabh A. Gupta, 3rd Year Student, B.B.A. LL.B. (Hons.), National Law University, Odisha]
Recently, the new minimum public shareholding of 25 % in all the private sector listed companies has kicked in thus, mandating all the private sector held listed companies to mandatorily offering at least 25% of the shares to the public. Thus a number of companies notably Tata Communications and Wipro have taken steps to increase their public stake using methods such as offering existing shares to the public, selling promoter shareholding, and issuing fresh shares to the public. But in the backdrop of this, around 105 listed companies failed to comply with the minimum public shareholding norm of 25% as mandated under the Securities Contracts Regulations (Rules), 1957 ("SCR Rules") within the stipulated deadline of June 3, 2013. Therefore, the current scenario pertaining to enforcement of minimum shareholding regime would be discussed and lastly a brief analysis of Gillette case would be provided in order to comprehend why SEBI rejected the Gillette’s scheme/plan to offload its share to meet the new minimum shareholding requirement.
Recently, the new minimum public shareholding of 25 % in all the private sector listed companies has kicked in thus, mandating all the private sector held listed companies to mandatorily offering at least 25% of the shares to the public. Thus a number of companies notably Tata Communications and Wipro have taken steps to increase their public stake using methods such as offering existing shares to the public, selling promoter shareholding, and issuing fresh shares to the public. But in the backdrop of this, around 105 listed companies failed to comply with the minimum public shareholding norm of 25% as mandated under the Securities Contracts Regulations (Rules), 1957 ("SCR Rules") within the stipulated deadline of June 3, 2013. Therefore, the current scenario pertaining to enforcement of minimum shareholding regime would be discussed and lastly a brief analysis of Gillette case would be provided in order to comprehend why SEBI rejected the Gillette’s scheme/plan to offload its share to meet the new minimum shareholding requirement.
All listed companies in India are regulated through
three securities acts/rules which are-
a. The
Securities and Exchange Board of India Act, 1992 (‘SEBI Act’)
b. The
Securities Contracts (Regulation) Act, 1956 (‘SCRA Act’)
c. The
Securities Contracts (Regulation) Rules, 1957 (‘SCR Rules’)
BACKGROUND
The requirement to maintain a minimum public
shareholding of 25% of each class or kind of equity shares or convertible
debentures issued by a listed company was always provided under Rule 19(2) (b)
of “Securities Contract Regulation Rules (SCCR)”[1]. Regulators
have always been advocating for introduction of minimum public shareholding in
listed companies for the reason that it aids in ensuring liquidity in the
market and discovery of fair price. Further, the availability of requisite
floating stock ensures reasonable market depth and trims down susceptibility of
listed securities to market manipulation.
Therefore, in furtherance of the aforementioned
objectives, SEBI amended Rule 19(2)(b) of SCR Rules and added Rule 19(A)[2] to
the SCR Rules vide the Securities Contracts (Regulation) (Amendment) Rules,
2010 thereby expressly obligating all listed companies to maintain at all times
at least 25% of minimum public shareholding. SEBI also obligated all
non-compliant listed companies to increase their public shareholding to 25% by
June 3, 2013 through any of the following methods prescribed by SEBI:
1. Issuance of shares to the public
through prospectus.
2. Offer of sale of shares held by
promoters through prospectus.
3. Offer for sale by promoters on
the floor of stock exchanges.
4. Institutional Placement
Programme ("IPP")
5. Rights issue/bonus issue to
public shareholders, with promoters and promoter group shareholders forgoing
their rights entitlement/bonus entitlement.
6. Any other method as approved by
SEBI on a case to case basis
Now, based on the information provided by the
National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), 105 listed
companies have still not complied with minimum public shareholding requirement
as required under the provisions of Regulation 19(A) and Regulation 19 (2) (b)
of the Securities Contract (Regulation) Rules, 1957. SEBI has primarily
attributed the non-compliance to the promoters and directors of the defaulting
listed companies. Also, according to SEBI, the promoters and directors often
take advantage of their excess shareholding to the disadvantage of the public
shareholder as quite often only promoters and directors’ interests are taken
into account thus excluding the interest of the public shareholders. Further,
such non-compliance by some companies puts the promoters/promoter groups of
compliant companies at a disadvantageous position in comparison to the
promoters/ promoter group of the non-compliant companies.
PENALTIES FOR NON-COMPLAINT LISTED COMPANIES
Thus pertaining to the current situation prevailing,
concerning the minimum shareholding requirement, and with an aim to restore the
balance between the public and non-public shareholding and removing the
disproportionate advantage arising out of the non-compliance, the SEBI has
directed the following actions[3]-
1. Voting
rights and corporate benefits like dividend, bonus shares, split, etc. in
respect of the excess of the proportionate promoter/promoter group shareholding
would be frozen till compliance with the minimum public shareholding
requirement is achieved.
2. The
promoters/promoter group and directors of non-compliant companies are barred
and prohibited from dealing in securities of such companies, whether directly
or indirectly. However, they are allowed to deal in securities for the sole
purpose of complying with the minimum public shareholding requirement.
3. The
shareholders forming part of the promoter/ promoter group and directors of
non-compliant companies are prohibited from holding any new position as
director in any listed company, till the minimum public shareholding requirements
have been complied.
It is worth mentioning here that not only does the
SEBI’s order restrict the promoter/ promoter group/ directors from holding new
positions in the non-compliant companies, but it also extends to any company
listed on any stock exchanges in India.
SEBI has also clarified that the Order is without
prejudice to its right to take any other action which it deems apt and
befitting against the promoters of non-compliant companies including the
following:
1. Levying monetary penalties under
adjudication proceedings;
2. Initiating criminal proceedings;
3. Moving scrip to trade-to-trade segment;
and
4. Excluding scrip from F&O
segment.
Brief analysis of Gillette case- Why SEBI rejected
its method of meeting minimum shareholding requirement
The facts are such that Procter & Gamble India
Holdings BV (P&G) is a promoter of Gillette having 75.9% voting rights. The
Poddar group is the Indian promoter of Gillette with 12.9% voting rights. The
total promoter holding is in excess of the 75% permitted by the public
shareholding norms. Therefore, Gillette’s proposed that Poddar group would
first transfer 4% of its shares to P&G. Thereafter, the Poddar group would
be categorized as an ordinary public shareholder as it would lose all its
rights as a promoter (including by virtue of termination of rights under the
shareholders agreement and articles of association). This approach was opposed
by SEBI on the ground that it violates the spirit of the public shareholding
norms in that the promoter holding would, in fact, be increased rather than
diluted in the process.
Thus, it basically involved reclassification of a
top company executive as non-promoter entity and the proposed scheme of
shareholding arrangement to meet the norms was rejected by the SEBI and further
on appeal rejected by the SAT (Securities Appellate Tribunal).
Further, taking action against promoters of Gillette
India for non-compliance to minimum public holding norms, the Securities and
Exchange Board of India's (‘SEBI’) ordered freezing of all corporate benefits
arising out of their stake in the company. Also, it has restrained the
promoters and directors from taking up any new position as director in any
listed company.
Thus, given that stringent penalties have been
imposed on the Gillette, it would be very interesting to see what scheme the
company comes up with to meet the new mandatory minimum requirement. Also, the
Gillette case would serve as a reprimand for the non-complaint listed companies
to soon prune out their shareholding. So, lastly sooner rather than later, all
the listed companies would cut down their shareholding to the minimum 25%
public shareholding.
[1]
Rule 19(2)(b) of SCR Rules:
(i)
At least twenty five per cent of each class or kind of equity shares or
debentures convertible into equity shares issued by the company was offered and
allotted to public in terms of an offer document; or
(ii)
At least ten per cent of each class or kind of equity shares or debentures
convertible into equity shares issued by the company was offered and allotted
to public in terms of an offer document if the post issue capital of the
company calculated at offer price is more than four thousand crore rupees:
Provided
that the requirement of post issue capital being more than four thousand crore
rupees shall not apply to a company whose draft offer document is pending with
the Securities and Exchange Board of India on or before the commencement of the
Securities Contracts (Regulation) (Amendment) Rules, 2010, if it satisfies the
conditions prescribed in clause (b) of sub-rule 2 of rule 19 of the Securities
Contracts (Regulation) Rules, 1956 as existed prior to the date of such
commencement:
Provided
further that the company, referred to in sub clause (ii), shall increase its
public shareholding to at least twenty five per cent, within a period of three
years from the date of listing of the securities, in the manner specified by
the Securities and Exchange Board of India.
[2]
Rules 19(A) of SCRR:
(1)
Every listed company [other than public sector company] shall 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.
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