The Securities and Exchange Board of India (“SEBI”), vide its interpretative letter of opinion (dated October 17, 2016) under the SEBI (Informal Guidance) Scheme, 2003 (“the IG Scheme”) in the matter of M/s. Alembic Pharmaceuticals Limited (“Alembic”) clarified that shareholder approval is not required for reclassification of shareholding from promoter group to public category.

Alembic had sought guidance from SEBI under the IG Scheme vide its letter dated September 21, 2016. Alembic had submitted that 5 (five) persons out of 25 (twenty-five) persons who were part of the promoter group were desirous of reclassification of their shareholding from promoter group to public category. One of the reasons put forth by the company was that these 5 (five) persons were not directly or indirectly connected with any activity of Alembic as they were senior citizens leading their lives and occupations independently. Other reasons given for reclassification were that such persons never held any position of key managerial personnel in Alembic and they did not have any special rights through formal or informal arrangements with Alembic or any person in the promoter group, etc. After the reclassification, the promoter group shareholding was to be at 72.68%.

The issue on which interpretative letter was sought from SEBI by Alembic was that whether Alembic could approach the Stock Exchanges directly for permission under Regulation 31A (2) and (3) of the SEBI (Listing Regulations and Disclosure Requirements) Regulations, 2015, with shareholder approval being dispensed with. Regulation 31A of the SEBI (Listing Regulations and Disclosure Requirements) Regulations, 2015 provides for disclosure of class of shareholders and conditions for reclassification. Sub-regulation (2) and (3) are as below:

“(2) The stock exchange, specified in sub-regulation (1), shall allow modification or reclassification of the status of the shareholders, only upon receipt of a request from the concerned listed entity or the concerned shareholders along with all relevant evidence and on being satisfied with the compliance of conditions mentioned in this regulation.

(3) In case of entities listed on more than one stock exchange, the concerned stock exchanges shall jointly decide on the application of the entity/ shareholders, as specified in sub-regulation(2).”

SEBI’s view in its interpretative letter on the issue is that, “the company may not be required to obtain approval of the shareholders for the proposed reclassification.However, such reclassification may be allowed by the stock exchanges under Regulation 31A (2) and (3) of the Listing Regulations subject to compliance of Regulation 31A.”

VA View

The procedure for reclassification required that the promoters proposing to reclassify themselves as public shareholders apply to the company, which then informs the stock exchanges. Once the proposal is accepted by the board of the company, the approval from shareholders is required to be obtained by way of ordinary resolution. Subsequently, the company has to submit the outcome of shareholders' approval to the stock exchange in the prescribed format so as to formalize the process of reclassification of promoters to public shareholder.

With this informal guidance, SEBI has made it clear that shareholder nod is not required for reclassification of shareholding from promoter group to public category. However, applicable provisions under the SEBI (Listing Regulations and Disclosure Requirements) Regulations, 2015 have to be adhered to in this regard.

This clarification by SEBI assumes particular significance considering the recent trend observed as emerging in the country whereby several promoters in various companies want to re-classify their shareholding from promoter group to public category. Promoters not involved in the day-to-day operations of companies would like to re-classify themselves as public shareholders. The purpose behind such reclassification is clear, to avoid the constant legal scrutiny and be exempt from possible litigation on charges like insider trading and other legal responsibilities involving the company. This trend will now intensify with the SEBI informal guidance that shareholders' nod is no longer required for re-classification of promoter group members to public category.