Independent kin can't be recategorised as public shareholders: Sebi

Regulator's informal guidance may have repercussions on several listed companies, say legal experts

The Securities and Exchange Board of India (Sebi) has held that a promoter’s kin cannot be recategorised as public shareholders, even if they live independent lives or are uninvolved in the affairs of the company.

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

In a letter to Sebi, the owner of Red Tape, a brand of shoes, sought guidance on whether married daughters of the managing director (MD) and promoter, holding more than 10 per cent of the voting rights in the listed company but living separate lives with no involvement in the firm’s management, can be reclassified from the promoter group to the public category.

Replying to the query, Sebi said: “By virtue of the definition of ‘promoter group’ under the Issue of Capital and Disclosure Requirements (ICDR) norms, the daughter of the promoters are immediate relatives and are a part of the promoter group, irrespective of the fact that they are married and living a separate life, 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 his two married daughters, who do not hold shares of the company and whose names do not form a part of the promoter group, the firm’s letter to Sebi reveals.

The regulator has said that under Regulation 31(A)(6) of the Listing Obligations and Disclosure Requirements (LODR), in the case where shares held by entities belonging to the promoter group are gifted, the recipient of such shares shall be classified as a promoter or a person belonging to the promoter group immediately. 

In its informal guidance, Sebi has also quoted Regulation 2(1) of the ICDR, which says that the promoter group includes “an immediate relative of the promoter (i.e. any 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 reclassification and persons related to the promoter(s) seeking reclassification 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 compliance and disclosure burdens and also removes certain restrictions on trading.

Sebi’s informal guidance mechanism is a facility through which an entity can seek advice from the regulator to understand the position of 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.