Independent kin aren't public shareholders, Sebi tells Mirza International

The Securities and Exchange Board of India (Sebi) has held that promoter’s kin cannot be re-categorized as ‘public’ shareholders even if they live independent lives or have no involvement in the company's affairs.

The view was issued by the market regulator in the form of an ‘informal guidance’ sought by the shoe manufacturer Mirza International.

In a letter to Sebi, the owner of the Red Tape shoe brand wanted to know if the MD-promoter's married daughters, who hold more than 10 per cent voting rights in the listed company, but live separate lives and are not involved in the firm's management, can be moved from promoter group to the public category.

Replying to the query, the market regulator said, “By virtue of the definition of ‘promoter group’ under the ICDR (Issue of Capital and Disclosure Requirements), the daughters of the promoters are immediate relatives and are a part of the promoter group, irrespective of the fact that they are married and living separate lives, or that they do not have any involvement in the management of the company.”

Mirza International’s MD Rashid Mirza, who holds 11.27 per cent stake in the company, plans to gift some of his shares to two of his married daughters, who do not hold shares of the company nor do their names form part of the promoter group, the company’s letter to Sebi reveals.

The regulator said under Regulation 31(A)(6) of LODR (listing obligations and disclosure requirements), as soon as shares held by entities belonging to the promoter group are gifted, the recipient shall be classified as a promoter or person belonging to the promoter group.

In the informal guidance, Sebi has also quoted regulation 2(1) of the ICDR which says the promoter group includes “an immediate relative of the promoter (that is, spouse of that person, or any parent, brother, sister or child of the person or of the spouse). The regulator has also cited regulation 31A(3) of LODR which says “the promoter seeking re-classification and persons related to the promoter (s) seeking re-classification shall not together hold more than 10 per cent of the total voting rights in the listed entity.”

Legal experts say the guidance to Mirza International could have repercussions to other listed firms, particularly those who have reclassified their promoters as public shareholders.

Being part of the public shareholders eases the compliance and disclosure burden and also removes certain restrictions on trading.

Sebi’s informal guidance mechanism is facility whereby an entity can seek advice from the regulator to understand the position of the law. The regulator’s views are based on the information provided by those seeking guidance. Sebi’s actual position, however, could differ if factors or conditions are different from those stated while seeking such guidance.