Directors of listed companies would henceforth have to monitor their holdings in the companies on which they are directors to see if their holdings cross reporting thresholds specified under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ("Takeover Regulations") for "persons in control" over a listed company. In a far-reaching decision, the Securities and Exchange Board of India (Sebi) has ruled in an adjudication order that members of the board of directors of a listed company ("Target Company") would be persons having control of the Target Company.
Adjudication proceedings had been initiated against members of the board of directors of Matra Realty Ltd, the Target Company, for failure to comply with disclosure requirements under the Takeover Regulations. The noticees took a stance that the Target Company did not have promoters and it was a board-driven company. Moreover, the members of the board of directors did not have a controlling stake in the Target Company, and therefore, the directors were not in control over the Target Company. Therefore, it was argued that there was no obligation to disclose any promoter shareholding in terms of Regulation 8(2) of the Takeover Regulations.
Regulation 8(2) of the Takeover Regulations requires a "promoter" or "any person having control over a company" to report the holding within 21 days of the end of every financial year and record date for declaration of dividend. The term "promoter" is itself defined in Regulation 2(1)(h) of the Takeover Regulations as any person who is control over the company and any person named in a securities offer document or in a filing with stock exchanges as a "promoter" of the Target Company.
In the order, Sebi has ruled that since the Target Company was a board-managed company, the directors alone could have exercised control over the Target Company. Therefore, their own shareholding ought to have been disclosed since they were "persons having control over a company".
The term "control" is defined in the Takeover Regulations as including "the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert".
The Sebi order notes "any person who controls the management of a company either individually or collectively with other persons or controls or influences the policy decisions by virtue of his position, can be said to be in 'control' over the affairs of the company. In the present case, the noticee was a part of the board of directors which controlled the affairs... A director is one of the controllers of the company's affairs.
The Board of Directors is the brain and the company is the body. The company can and does act only through the Board. When the brain, i.e. the Board, functions, the company, i.e. the body, is said to function. Thus, the functioning of the company is totally controlled and directed by the Board."
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Sebi noted that the Target Company was a board-managed company, the board had only three directors at the relevant time, and these directors along with persons acting in concert indeed held shares at the relevant time. Sebi has ruled that being "persons having control over" the Target Company, the three directors ought to have made their disclosures under Regulation 8(2) of the Takeover Regulations. For failure to make such disclosure, monetary penalty has been imposed.
The decision has implications not only for board-managed companies that do not have promoters (for example, ICICI Ltd. and Larsen & Toubro), but also for every listed company in which directors have shareholding in the company. Every listed company would have to report the shareholding of its directors under the head "persons having control" - quite distinct from the holding of the "promoters".
A corollary of the ratio set out in this order is the shareholding of every director and persons acting in concert with the director would have to be tracked, recorded and aggregated for purposes of reporting under Regulation 8(2) of the Takeover Regulations. Regulation 8 contains the continual disclosure requirements and failure to file a report specified in the regulations entails a penalty of upto Rs 1 lakh per day. Listed firms and their directors would be well advised to start tracking this information to avoid allegations of non-compliance with the Takeover Regulations.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed are his own) somasekhar@jsalaw.com