Every listed entity is required to adhere to the minimum public shareholding (MPS) norms specified in the Securities Contracts (Regulation) Rules, 1957. While MPS violations have been addressed by SEBI until now, through a recent circular, SEBI has created an obligation on stock exchanges to monitor compliance and address violations.
Exchanges are now required to monitor listed companies and must issue notices to listed entities within 15 days on observing any non-compliances. The circular requires exchanges to undertake three kinds of actions against non-compliant companies: (1) restrict promoters and directors from taking up new directorships in listed companies; (2) impose fines of Rs. 5,000 per day of non-compliance until the issue is rectified and Rs. 10,000 per day if the company remains non-compliant for more than one year; and (3) freeze promoter shareholding in non-compliant listed company and, if the company remains non-compliant for more than one year, freeze demat accounts of the promoters. Such freeze shall not act as an impediment to any attempts at complying with the MPS requirements. In addition, exchanges may also consider compulsory delisting of the non-compliant listed companies. As exchanges are required to periodically disclose names of non-compliant companies, fines imposed and paid, freezing of shares, etc. on their website, investors will be informed of such developments.
While the actions specified in the circular are not detrimental to the power of SEBI to take action for MPS violations, the circular is a welcome move as it will reduce the burden on SEBI and allow them to take action on more significant matters.