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Informal Guidance in the matter of Alembic Pharmaceuticals

Finsec Law Advisors

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SEBI, in an informal guidance dated October 17, 2016, allowed M/s Alembic Pharmaceuticals to reclassify its promoters without having to obtain shareholders’ approval. Under Regulation 31A(2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, stock exchanges may allow modification/ reclassification of the status of the shareholders upon receipt of a request from the company or the concerned shareholders. Further, Regulation 31A(5) and 31A(6) make reclassification of promoters subject to shareholders’ or in approval, in case a new promoter replaces the earlier promoter pursuant to an open offer or in any other manner, or the entity becomes ‘professionally managed’ and there is no identifiable promoter.

In the instant case, the promoter group held 74.13% equity shares and out of the 25 persons in the promoter category, 5 persons (holding 1.45% of the equity share capital) sought to be reclassified from promoter group to public category. Alembic sought to know if it could directly approach the stock exchanges and submitted that the reclassification was for the following reasons: (i) The said persons are senior citizens living their lives independently and are not directly or indirectly connected with any activity of the company. (ii) These persons did not directly or indirectly control the affairs of the company nor were they ever any key managerial personnel of the company. (iii) They did not have any special rights by virtue of any formal or informal arrangements, nor would they privy to price sensitive information of the company.

SEBI opined that the company need not obtain shareholders’ approval for the proposed reclassification and stock exchanges may permit the reclassification under the relevant clauses of Regulation 31A(2) subject to compliance with Regulation 31A. However, the reasoning and logic behind such conclusion is not clear, given that SEBI has specifically stated that it does not necessarily agree with Alembic’s analysis. As per Alembic’s application, the reclassification would not fall within Regulation 31A(5) or 31A(6). Accordingly, there appears to be no requirement of taking shareholders’ approval.

SEBI does need to relook at the overly rigid structure provided for de-classification of promoters. Just like shareholders cannot by a meeting make the sun rise in the west, shareholders’ vote is irrelevant to the highly factual enquiry whether a person is no longer a promoter. Other rigidities in percentage terms also need to be relooked at to make them fall in line with the reality on the ground.