Shareholding law needs more clarity

WITHOUT CONTEMPT

An important milestone in securities regulation in India was reached last week. The Securities and Exchange Board of India ("SEBI") prescribed new norms for maintenance of public shareholding by listed companies.

However, there is still some way to go before listed companies can breathe easy.

The new Clause 40A of the Listing Agreement (itself a peculiar regulatory arrangement, but more about that later) essentially mandates a 25 per cent public shareholding for all listed companies.

However, there are exceptions to this rule. Companies that originally floated less than 25 per cent but more than 10 per cent when they first got listed may make do with a 10 per cent public shareholding.

So also, companies that have an outstanding equity share capital comprising at least two crore shares and an average daily market capitalisation of at least Rs. 1,000 crore in the previous financial year, would have a minimum public shareholding requirement of 10 per cent.

This clarity was long overdue. The minimum level of public shareholding prescribed in the listing agreement has implications for the target non-public shareholding necessary to delist a company.

While the delisting guidelines seem to have been drafted with a view to making delisting virtually impossible, at least now Indian investors are clear on what level of public shareholding would be necessary to delist a listed company.

However, material legal provisions have been tucked away into the new Clause 40A subtly. For the first time, shares underlying outstanding global depository receipts (GDRs) have been completely excluded from the computation of "public shareholding".

Worse, such shares are not excluded from the total capital. To add insult to injury, the Sebi circular states that public shareholding "would continue to comprise" shares other than those held by promoters and those underlying GDRs.

This is rather strange because not too long ago, Sebi had filed an affidavit before the Securities Appellate Tribunal, which, in a nutshell, meant that Sebi did not have a view on whether public shareholding ought to include shares underlying GDRs.

Stock exchanges have been empowered in a big way. Companies that do not meet the prescribed levels of public shareholding by May 1, 2006, may be granted an extension by stock exchanges for a period not stretching beyond May 1, 2008.

Even further extensions may be granted for reasons recorded in writing, subject to a cap of another year. Exchanges would do well to publicly notify the basis on which they would take such decisions so that the market system is clearly aware of what is expected of them and how to plan increasing public shareholding.

Every stock exchange with nationwide terminals will now have a say over Clause 40A time extensions for companies listed on it. Consequently, for practical purposes, unless the National Stock Exchange and the Bombay Stock Exchange come up with a unanimous policy on how they would consider requests for grant of extensions, listed companies could have a torrid time in getting exchange approvals.

A new concept of "supervening extraordinary events" has been brought in. Clause 40A (V) requires stock exchange approval for such events to occur.

However, Clause 40A (VI) permits public shareholding to fall below the applicable minimum.

Clause 40A (viii) empowers stock exchanges to provide an extension of up to one year for compliance with Clause 40A should any supervening extraordinary event have occurred.

The illustrative list of such events queers the pitch even further. For instance, re-organisation of capital through a scheme of arrangement is listed as an illustrative example of a supervening extraordinary event. However, since 2003, Sebi has mandated that before any scheme of arrangement may be filed with the high court, stock exchange approval would be necessary and that the exchanges would have to check if any securities law is being violated.

Another example is fall in public shareholding to below minimum under the takeover regulations. However, the takeover regulations entail that there can be no acquisition that could result in the public shareholding falling below the prescribed minimum.

Finally, it is high time the concept of the listing agreement (a bilateral contract, which arguably is private law) to govern listed companies gives way to listing regulations (public law binding the world at large). Today, it is assumed that amendments to the model listing agreement would automatically govern companies that have not signed the amended standard agreement.

Moreover, the Securities Contracts Regulation) Rules, 1957, too, govern listed companies and clearly overlap with the listing agreement. Often, amendments to one would necessitate amendments to the other. The concept of the listing agreement should simply be scrapped and the provisions ought to be prescribed as regulations. After all, Sebi has unfettered rights to make and amend regulations it makes.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own)