The SEBI headquarters in Mumbai, India (Photographer: Adeel Halim/Bloomberg)

SEBI Proposes New Rules To Simplify Promoter Reclassification

In an effort to simplify and unify the many existing provisions for reclassification of promoters to public shareholders, market regulator SEBI has proposed a new set of rules. These will come in handy for companies like Infosys where erstwhile promoters have sought reclassification.

According to SEBI, to be eligible to apply for reclassification, the promoter and those acting in concert with him should not hold more than 10 percent voting rights in the listed entity, should not exercise over the listed entity control directly or indirectly, should not have any special rights through formal or informal arrangements and should not have any board representation.

Also, the promoter seeking reclassification should not be a wilful defaulter, as defined by the Reserve Bank of India. And reclassification should be permitted only for compliant listed companies.

The consultative paper issued by the Securities and Exchange Board of India makes the following suggestions

  • Currently, application for reclassification may be filed either by the listed entity or concerned shareholder to the stock exchange.

To prevent any misuse by companies, reclassification is proposed to be permitted only upon the request of the promoter to the listed entity.

  • Currently the board plays no role in the reclassification process.

Hence it is proposed that the company place the promoter’s reclassification request before the board of directors for their positive/negative view.

  • Currently shareholder approval is required only in certain specified cases.

Hence it is proposed that all reclassification requests and the board recommendation be put to shareholder vote in a general meeting via an ordinary resolution.

SEBI has also proposed that promoters abstain from the vote.

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 Paper

The market regulator has also proposed a 6 month “cooling-off” period between the board meet and shareholder meet.

As is the case now, the final decision on reclassification will be taken by stock exchanges where the company is listed. Each step in the process of reclassification will be considered a material event for disclosure to shareholders by the company.

In case of promotership due to succession, inheritance or gift the inheritor would be classified promoter and would have to comply with the various reclassification provisions. “The concerned stock exchanges shall jointly decide on the application of the concerned listed entity,” said the SEBI paper.

No Promoter?

SEBI also proposes to do away with the “professionally managed” label for companies with no promoter - that is, where no person or those acting in concert with him hold more than one percent of the paid-up equity capital of the company.

Instead SEBI has proposed that companies with no promoter be labelled ‘the listed entities having no promoter’.

It may be specified that a listed entity shall be considered as ‘the listed entities with no promoter’ if due to reclassification or otherwise, the entity does not have any promoter.

SEBI has sought public comments on the consultative paper by August 16.