In an informal guidance dated October 30, 2017, SEBI has permitted Gujarat Ambuja Exports Limited (Company) to reclassify one of its promoters as a public shareholder by seeking an approval directly from stock exchanges, without obtaining shareholders’ approval.
Promoters of a listed company are subject to constant legal scrutiny and have onerous obligations under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI (Prohibition of Insider Trading) Regulations, 2015, and other SEBI Regulations. Under Regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI has provided a mechanism for reclassification of promoters as public shareholders in cases where the role of an existing promoter changes drastically and the ordinary compliance obligations are no longer warranted. As per Regulation 31A, a promoter or the company can request the stock exchange(s) for reclassification of a promoter under three situations: a) a transmission/succession/inheritance, b) a change in the promotership after an open offer, and c) when a company becomes ‘professionally managed’. Reclassification is also conditioned upon other factors such as the promoter holding less than a specified threshold of shareholding, not holding key managerial post, not having any special rights in the company, not exercising control, etc.
Since, Regulation 31A is restricted to the three situations only, a question arises as to whether a promoter can be reclassified as a public shareholder in other situations where the conditions necessitating a reclassification exist, but the case does not fall squarely within the three categories mentioned in Regulation 31A. If yes, whether a shareholders’ approval would be necessary.
In the instant matter, the promoter of the Company held 0.23% of the total shareholding, did not have any veto or special rights, or control over the Company. Although he is the son of another promoter holding 23.13%, he was not connected, directly or indirectly, with any activity of the Company. The Company had neither become professionally managed nor had there been any takeover. The Company, through its letter, requested guidance as to whether the promoter could reclassify himself as a public shareholder without obtaining shareholders’ approval. SEBI took a view that, considering the given factual situation, the Company may approach the stock exchanges directly for the reclassification, without obtaining shareholders’ approval.
It appears from the approach adopted by SEBI (Similar informal guidance was issued in 2016 to Alembic Pharmaceuticals) that promoter reclassification may be permissible in cases other than those expressly specified in Regulation 31A and the determination would turn on a subjective evaluation of the shareholding, rights, and control exercised by the relevant promoter. Further, the requirement for a shareholders’ approval for reclassification may also be dispensed with. While this interpretation is progressive and laudable, the regulatory position ought to be reflected in Regulation 31A itself, instead of an ad-hoc informal guidance. Therefore, we believe Regulation 31A ought to be amended to reflect this subjective test for reclassification of promoters as public shareholders.