On November 23, 2020, SEBI issued a consultation paper (Consultation Paper) seeking public comments on the regulator’s proposal to revise the legal framework governing re-classification of promoter/promoter group entities to public shareholders under Regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). After reviewing the difficulties faced by promoters and listed companies in complying with Regulation 31A of the LODR Regulations, SEBI has proposed to relax, simplify and streamline the extant law to make it less cumbersome.
Under the current law, before a listed company makes an application to the stock exchanges to seek their approval for re-classification of a promoter to a public shareholder, inter alia three broad steps have to be taken. Firstly, the concerned promoter is required to make an application to the company. Secondly, the board of directors of the company will have to analyse the re-classification application and place the same along with their views before the shareholders in a general meeting for their approval. Thirdly, shareholders (excluding the promoter and persons related to the promoter) of the company will have to approve the request for re-classification. It is to be noted that there must be a minimum gap of 3 and a maximum of 6 months between the aforementioned board meeting and the general meeting. Pursuant to the receipt of the shareholders’ approval, the company must make an application to the stock exchanges to seek their approval within 30 days therefrom.
SEBI has proposed that the minimum threshold of voting rights that can be held by a promoter (along with persons related to the promoter) who seeks re-classification should be increased from 10% to an amount not exceeding 15% of the voting rights of the company. The increased threshold will allow more promoters who do not exercise any direct or indirect control over a company to reclassify themselves as public shareholders without having to reduce their shareholding in the company. Further, to streamline the re-classification process, it has been proposed that companies that receive requests for re-classification must place the same before the board of directors within a period of 1 month therefrom. Introducing a definitive timeline for companies to take action will ensure the timely processing of applications. Furthermore, it has been recommended that the stipulated time gap between the date of the board meeting and the shareholders’ meeting for consideration of a promoter’s reclassification application should be reduced to a month. At present, the provisions of Regulations 31A(3), 31A(4)(a) & (b) and 31A(8) do not apply to cases where reclassification of a promoter takes place as per a resolution plan approved under Section 31 of the Insolvency Code. SEBI has proposed that the aforementioned exemptions should be extended to instances where the process of reclassifying a promoter is initiated pursuant to government/regulatory orders or as a consequence of the operation of law, subject to the condition that the concerned promoter shall not remain in control of the listed company. Further, in view of the past instances involving the failure of companies to disclose the identity of promoters/promoter group entities holding ‘nil’ shareholding, the Consultation Paper has proposed to impose an obligation on companies to make requisite disclosures even for promoters/promoter group entities that have ‘nil’ shareholding in the company.
The aforementioned recommendations aimed at primarily amending Regulation 31A is a move in the direction as it will bring greater clarity and help streamline the process for reclassification of promoters to public shareholders. Further, mandating companies to disclose the identity of promoters/promoter group entities holding ‘nil’ shareholding will bring about greater transparency in the market.