Regulatory Update – SEBI : Proposes three-phase process for re-classification of promoters as public shareholder

SEBI on July 24, published its consultation paper on ‘Consultative Paper on Revision of Provisions pertaining to Reclassification of Shareholders’, wherein SEBI has proposed a three phase process for reclassification of promoters as public shareholders. The issue of re-classification had assumed significance at the time of implementation of minimum public shareholding (MPS) norms. In order to comply with the 25 per cent MPS rule, some entities were seen re-classifying themselves as ordinary shareholders just to comply with the regulations. As per the consultation paper issued by SEBI, the following process to be followed for re-classification of promoters as public shareholders:

  • Stage I-Application by the promoter to the listed entity for re-classification as a public shareholder: Currently, the  application  for  re-classification  may  be  filed  either  by  the  listed entity or concerned shareholder to the stock exchange. It has been observed that permitting the listed entity to re-classify a promoter as a public shareholder without any application for such re-classification from the concerned promoter is prone to misuse. Further, there is no specific requirement for the promoter to apply for re-classification through the listed entity. Therefore, it is proposed that re-classification is to be permitted only upon the request of the promoter to the listed entity.
  • Stage II-Placing the request of the promoter before the Board of Directors of the listed entity: Currently there is no clear role of the board of directors of the listed entity under the current provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 in the matter of re-classification of a promoter into a public shareholder. It is proposed that on receipt of request for reclassification from the promoter, the listed entity shall be required to place it before its board of directors and the recommendations of the board (positive/negative) may be required to be placed before the shareholders.
  • Stage III: Approval by the shareholders: Shareholder approval is currently required only in certain specified cases. The profile of promoters/ promoter group is generally an important criteria  for investors to make their  investment  Therefore, it is  critical  that investors have a say in all reclassification requests of promoters. Hence, it is proposed that in all cases of re-classification of promoters, including the recommendation  of  the  board, shall  be  required  to  be  placed  by  the  listed entity  before  the  shareholders  in  a  general meeting  and  approved  through  an ordinary resolution. In order to avoid conflict of interest, it is proposed that the specific promoter who has requested  such  reclassification,  its  promoter  group  and persons acting in concert shall not be permitted to vote on such resolution. Further, the listed entity shall ensure a time gap (a cooling off period) of at least 6 months between the date of board meeting and the shareholder’s meeting considering the request of the promoter.

SEBI has also issued the conditions which are applicable  for  promoters  to  be  eligible  for  re-classification  as  public shareholders to ensure outgoing promoters do no exercise control over the listed entity. Each step in the process of reclassification will be considered a material event for disclosure to shareholders by the company. Also, re-classification to be  permitted  only  by  compliant  listed  entities.