Sebi proposes easier rules to reclassify promoters as public shareholders

Markets regulator Sebi today came out with proposals to simplify existing framework on re-classification of promoters as public shareholders. It has been proposed that if a promoter plans to be re-classified as a public shareholder, then the entity needs to first apply to the listed company. The listed firm would then seek the approval of the board and minority shareholders on the resolution.

Under the proposal, in all cases of re-classification of promoters, including the recommendation of the board, would be required to be placed by the listed entity before the shareholders in a general meeting and approved through an ordinary resolution. "In order to avoid conflict of interest, it is proposed that the specific promoter who has requested such reclassification, its promoter group and persons acting in concert shall not be permitted to vote on such resolution," Sebi said in a draft papers.

Further, the listed entity should ensure a time gap (a cooling off period) of at least six months between the date of board and shareholder's meeting considering the request of the promoter.
Currently, norms are specified for a scenario where a new promoter replaces the previous one subsequent to an open offer and where a firm is professionally managed and does not have any identifiable promoters.

Noting that different set of conditions for different scenarios might be confusing, Sebi has proposed a single set of conditions applicable to all situations of re-classification of promoters as public shareholders in order to simplify, streamline and bring greater clarity in existing regulations.

Besides, 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 and management and have a low shareholding, should have the option to be reclassified.

The Securities and Exchange Board of India (Sebi) has sought comments from public till August 16 on these proposals and final regulation will be put in place after taking into views of all the stakeholders.

In case of a specific promoter is seeking reclassification as a public shareholder, Sebi has proposed that its promoter group and the Persons Acting in Concert should not hold more than 10 per cent of the total voting power in the listed entity and exercise control over the affairs of the listed entity directly or indirectly.

Further, they should not have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements; should not be represented on the board of directors of the listed entity; act as a key managerial person in the listed entity. "Further, the promoter seeking reclassification shall not be a wilful defaulter," as per the proposal.

In the case of companies with no identifiable promoters and they are professionally managed, Sebi has proposed to raise the current threshold of promoters wanting to reclassify.

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At present, promoters with 1 per cent or above can apply for reclassification as public shareholders. Now, the regulator has suggested to to raise this to 10 per cent. Under the proposal, companies would be required to disclose the information on re-classification of promoters to stock exchanges within 24 hours.