SEBI: Relaxes Rules for Promoter Re-classification

The market regulator has agreed to relax the current promoter re-classification norms to change status from promoters to general shareholders. After receiving several requests from different parties, the market watchdog decided to alter the current eligibility threshold from 10 to 15 percent. In a public consulting paper issued, SEBI proposed re-classification of promoters’ resolution and said it is open to receive a general opinion on it.

Promoter re-classification is a process through which promoters of listed companies change their status to general investors. Under the current scenario, if promoter share falls below 10 percent, then the promoter can opt-out from their current role. The re-classification will allow promoters, who aren’t involved in day-to-day activities of the company and holding less than 15 percent stakes, to alter their status without reducing their shareholding.  

Public listing is a process for promoters to lower their shareholding in a company. When promoter stakeholding falls below a certain level, they can opt for re-classification as general shareholders. Earlier promoters with more than 10 percent but less than 15 percent stakeholding faced difficulties in changing their status, but in most cases, they were minor promoters and weren’t involved in daily decision making of the company.   

SEBI has been providing relaxation on case to case basis. However, the new SEBI rules for promoting public shareholders will help to reduce the number of exemptions and make the whole process more transparent.  

The current provision requires the board to directors to review promoter classification request before placing it for voting before shareholders. SEBI also proposed to reduce the gap between the board of director’s meeting and shareholder’s meeting from three months to one month. 

SEBI invited public feedback on the matter and kept a special feedback window open till December 24.

What Would Change?

SEBI received market feedback to review the current promoter re-classification threshold. Several promoters wanting re-classification of status found it challenging to exercise under the current 10 percent threshold. SEBI has proposed a change to raise the threshold limit to 15 percent, which will allow existing promoters with less than 15 percent stake in the company to request re-classification.   

• Listed companies are directed to release a list of promoters even with ‘nil’ shareholding and obtain a quarterly declaration from promoters and entities that form the ‘promoter group’ 
• Promoter and the related person requesting re-classification can’t hold more than 15 percent stake in the firm
• The current case to case basis exemption allowed in case of insolvency will now apply to other re-classification pursuant as well
• It will reduce the number of exemptions offered on a case-to-case basis
• Board and general shareholder meeting timeline to approve re-classification is reduced from three months to one month
• Relaxations allowed in case of government/regulatory orders
• Relaxation extended in case of the open offer. Open offer refers to an offer made by the acquirer to the existing stakeholders of the company to tender their shares
• The regulator suggested that any promoter seeking re-classification can’t remain in control of the company 

Exemptions For Pursuant of Open Offer

In case of pursuant of an open offer, the re-classification exemption will be granted to existing promoters, erstwhile promoter group that are no longer traceable or non-cooperative. However, to obtain exemptions in case of the open offer, the firm must mention its intent of re-classification of existing promoters in the letter of offer. 

Conclusion 

Re-classification of promoters’ resolution aims to accelerate and simplify the process, will also promote general shareholders. The current framework doesn’t specify a timeline for the company to place the re-classification proposal before the board, which adds to the ambiguity. The new norms will lower the threshold, allow exemptions to non-existing promoters, and reduce the number of earlier exceptions offered on a case-to-case basis.

The market regulator has agreed to listen to market feedback regarding the changes in the SEBI re-classification rules to change the status of erstwhile promoters to general shareholders. The proposal will add objectivity to the existing process of re-classification of promoters of listed companies.