| Sebi to launch consultation for promoter reclassification | ||
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Mumbai, 30 November Adopting a key non- legislative recommendation of the Financial Sector Legislative Reforms Commission ( FSLRC) panel for overhaul of financial sector regulatory framework, the Securities and Exchange Board of India ( Sebi) is launching apublic consultation for framing rules to allow reclassification of promoters at listed firms looking to become public shareholders. The new norms can have a significant impact on the way some merger and acquisition deals are structured, as also in cases involving corporate restructuring that take place due to disputes among members of business families or after settlements between rival corporates. Some of the scenarios where such reclassification has already been sought by promoters include cases of split in a promoter family, a main promoter selling majority stake to another investor, marriage between members of rival business families and a promoter group wanting to exit from day- to- day operations of a listed company. While the government is looking to implement many recommendations of FSLRC in days to come, it has asked regulators, including Sebi, to begin adoption of governanceenhancing and non- legislative suggestions made by this panel on a proactive basis. Consequently, Sebi has decided to frame all its major policy decisions after a public consultation process, as suggested by the FSLRC, a senior official said. "As the change in process of reform continues ... I have not the least doubt that a large number of these ( FSLRC) recommendations will actually see implementation in the days to come," Finance Minister Arun Jaitley said at a seminar organised by the BSE yesterday. While Sebi has been framing most of its key regulations after apublic consultation over the draft norms, it would now onwards follow this procedure for all policy matters having any significant implications for various market participants. As part of the new procedure, Sebi would make necessary amendments to its existing regulations governing re- classification of promoters after finalising a policy in this regard pursuant to a public consultation process. Among others, amendments might be required to the regulations governing takeovers, listing norms and the disclosure rules applicable to listed companies, the official said. A discussion paper containing draft regulations for reclassification of promoter as public shareholders, which have been finalised after detailed deliberations by Sebis Primary Markets Advisory Committee, would be soon put in public domain for comments from all stakeholders. The paper would also detail the various scenarios and conditions under which a promoter or promoter group can be reclassified as a public shareholder. At present, the regulatory framework does not prescribe any specific criteria for such reclassification, which Sebi feels is required to lend objectivity to the process of reclassification of promoters of listed companies as public shareholders under various circumstances. One of the scenarios include an existing promoter group entering into an agreement with anew group of investors for sale of a substantial stake and expressing its intention to become a public shareholders after giving away all special rights and privileges enjoyed by them. In another case, daughter of one of the promoters of a listed company gets married to a family member of a business rival and wants to re- classify her status as a public shareholder. The other test case presented by Sebi involves a promoter deciding to sell a majority of his or her stake to a new strategic investor looking for a controlling stake, and then retaining a minority stake along with position of chairman. | ||
| De- listing ' reform' will nudge more fraud | ||
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The fine print is yet to be out. However, even while waiting for the fine print, the very first paragraph in Sebi's press release on the subject makes it clear that de- listing transactions have been made far more difficult —they have not been made easier. The paragraph says: " The de- listing shall be considered successful only when ( A) the shareholding of the acquirer together with the shares tendered by public shareholders reaches 90 per cent of the total share capital of the company and ( B) if at least 25 per cent of the number of public shareholders, holding shares in dematerialised mode as on the date of the board meeting which approves the de- listing proposal, tender in the reverse book building process." The widening gap between approval of regulations by Sebi at a board meeting and the actual draft regulations being notified is worrisome. This practice demonstrates that the directors on the Sebi board, despite presiding over the governance of a regulatory body, consider the actual language of the regulations as too trivial to bother themselves with. It is evident that they approve regulatory prescriptions in abstract concept, although anyone involved with regulations anywhere in the world would know that the devil in regulatory frameworks lies in the detail. That is worthy of comment in a separate column altogether. Coming back to the Sebi press release, not only has de- listing been made tougher, the new intervention in the regulations is a material deviation from well- established principles of Indian corporate law. The prescription that 25 per cent of the public shareholders in number have to tender their shares is seriously problematic in implementation. Worse, it is blatantly in contradiction with the colour sought to be given to the " reform" of the regulations i. e. of making things easier. Two other new conditions have been imposed. First, the number of shareholders should have tendered their shares in dematerialised form. Second, the number of shareholders should be reckoned on the date on which the board approves the de- listing. It is well possible that a company can never delist simply because shareholders who held shares on the date the board approved may have sold their shares. Therefore, if there is a churn in the holdings of public shareholders, it is possible that more than 75 per cent of the shareholders who held shares on that date are no longer shareholders. In other words, the condition of at least 25 per cent shareholders in number as of a certain date should tender shares, could never be met. The most serious problem with the new approach is that Indian securities law would deviate for the first time from the well- established norm of corporate democracy — of reckoning voting rights in terms of percentage of shareholding rather than in terms of number of shareholders. For example, when company law lays down the standard for a resolution to be passed, it prescribes counting the vote in terms of voting rights attached to the shares. It does not provide for attaching equal voting rights to all shareholders regardless of how many shares each one owns. Sebi's new approach or introducing the number of shareholders as a metric, would initiate new jurisprudence that is wholly unnecessary. Such an approach could in fact incentivise fraud and impose enormous transaction costs on market players and serious administrative costs on Sebi to monitor compliance. When Sebi's stated objective is to combat fraudulent collusion between large public shareholders and the promoters when a company is being de- listed, it simply has to step up the game for enforcement. By changing the law, it is imposing an unwarranted burden on the market and on itself. Take the law on oppression and mismanagement under company law. The law places a materiality threshold for eligibility to approach the enforcement machinery in terms of 10 per cent of the voting rights or a hundred shareholders in number. This is to enable a greater access to justice if there were widespread discomfort among shareholders regardless of number of shares held. However, this very provision is a source of enormous litigation. Often, just before initiating litigation, shares get transferred to multiple persons to meet the eligibility threshold of the larger number of aggrieved shareholders. Weeks and months are then spent in intense litigation to determine the legitimacy of the very threshold to assert rights. Company managements typically allege that the transfers are a fraud only to meet eligibility norms. Shareholders argue that the literal meaning of the law should be adopted. In short, the new regulatory measure will nudge the securities market too towards adopting such bad practices, with the resultant litigation. Sebi's shoulders are very broad and their muscles are highly empowered to act against fraudulent practices when it finds collusion between promoters and sections of public shareholders. Both the Sebi Act and the regulations prohibiting fraudulent and unfair trade practices give Sebi sweeping powers. It should use that muscle for enforcement if it finds abuse in the de- listing market. The propensity to legislate against every problem, real and perceived, makes life difficult for all, and worse, seeds further bad conduct. The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own Sebi's propensity to legislate against every problem, real or perceived, makes life difficult for all WITHOUT CONTEMPT SOMASEKHAR SUNDARESAN The widening gap between approval of regulations by Sebi at a board meeting and the actual draft regulations being notified is worrisome | ||
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Chennai
Mobile 93810 11200
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