Sebi frames new rules for re-classification of promoter as public investor

Market regulator's norms will prevent outgoing promoters from continuing to exercise their control on the company directly or indirectly.

Markets regulator Sebi has announced new rules for re-classification of a promoter as a public investor, wherein an outgoing promoter will have to relinquish special rights as well as control over the affairs of the listed firm and will not be allowed to hold over 10% stake.

The promoter would not be allowed to have any representation on the board of directors or act as a key managerial person in the listed entity.

The promoter seeking re-classification must not be a wilful defaulter or a fugitive economic offender, the Securities and Exchange Board of India (Sebi) said in a notification dated November 16 .

These norms will prevent the outgoing promoters from continuing to exercise their control on the company directly or indirectly.

The norms, aimed at simplifying, streamlining and bringing greater clarity in existing regulations, come after Sebi’s board in September approved a proposal in this regard.

The Kotak panel on corporate governance had suggested that there should be a mechanism to enable such re-classification to ensure persons who may have been promoters but are no longer in the day-to-day control of management and have a low shareholding should have the option to be re-classified.

Under the new rules, in the case of a promoter seeking re-classification as a public shareholder, Sebi said the promoter group and persons acting in concert will not hold over 10% of the total voting power in the listed entity and exercise control over the affairs of the entity directly or indirectly and will not have “any special rights with respect to the listed entity through formal or informal arrangements”.

In order to ensure that only compliant listed entities are eligible to apply for re-classification, Sebi said such listed firms need to be compliant with 25% minimum public shareholding requirement; their shares should not have been suspended from trading and they must not have any outstanding dues to the regulator, exchanges and depositories.

In all cases of re-classification of promoters, including the recommendation of the board, the proposal would be required to be placed by the listed entity before the shareholders in a general meeting and approved through an ordinary resolution.

With an aim to avoid conflict of interest, Sebi said that the specific promoter who has requested such reclassification, its promoter group and persons acting in concert would not be permitted to vote on such resolution.

If any public shareholder seeks to re-classify itself as promoter, an open offer will have to be made.

In order to have greater clarity in case of transmission, succession, inheritance and gift of shares held by a promoter, Sebi said the recipient of such shares will be classified as a promoter immediately on occurrence of such event.

The regulator said that a listed entity will be considered as a ‘listed entity with no promoter’ if due to re-classification, the entity does not have any promoter. Earlier, such firms were termed as ‘professionally managed’.

In July, the regulator had come out with a draft proposal for re-classification of promoters and had sought public comments on it.