In a move targeted at facilitating compliance by listed companies of the ‘minimum public shareholding’ requirement, the Securities and Exchange Board of India (SEBI) has issued a circular dated 22 February 2018 (Circular), which provides two additional methods for achieving ‘minimum public shareholding’ by listed companies. These methods are in addition to those prescribed by SEBI vide its circular dated 30 November 2015 (2015 Circular).

Prior to the implementation of the Circular, listed companies were permitted to increase public shareholding only through the routes specified in the 2015 Circular. Such routes were: further issuance of shares to the public through a follow-on offer, offer for sale by the promoters to the public through a prospectus, an institutional placement programme, rights issue to the public, bonus issue to the public and any other method as may be prescribed by SEBI.

Minimum public shareholding requirement

Currently, public shareholders of a listed company are required to hold atleast 25% of the paid-up capital of the company (MPS Requirement), pursuant the provisions of the Securities Contracts (Regulation) Rules, 1957 (SCRR) read with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

However, at the time of listing, if a company has post issue paid-up capital of more than INR 1,600 crores (calculated at the offer price), then the offer to the public through the initial public offering may be less than 25%. Every listed company in which the public holds less than 25% of the paid-up capital is required to meet the MPS Requirement within a period of three years from the date of listing of its securities, in the manner specified by SEBI. Listed public sector companies have been provided time till August 21, 2018 to comply with the MPS Requirement.

Rationale behind minimum public shareholding requirement

The MPS Requirement stems from Rules 19(2) and 19A of the SCRR, which requires all listed entities to achieve and maintain “minimum public shareholding” of 25% at all times of each class or kind of equity shares or convertible debentures issued by a listed company. The term 'public' carries the same meaning as included under Rule 2 of Securities Contracts (Regulation) Rules 1957, as amended, which by definition excludes the promoter and promoter group of the listed company. SEBI’s underlying philosophy behind the MPS Requirement, as stated in the order dated 3 July 2013 passed by the Securities Appellate Tribunal in the matter of Gillette India Ltd v. SEBI and others, is “prevention of concentration of shares in the hands of a few market players by ensuring a sound and healthy public float to stave off any manipulation or perpetration of other unethical activities in the securities market which would unfortunately be the irrefragable consequence of the reins of the market being in the hands of a few”.

Prescribed manner of achieving minimum public shareholding

In order to further facilitate listed entities to comply with the MPS Requirement, the Circular has allowed listed companies to follow two additional methods:

  • Qualified Institutions Placement (QIP) - Allotment of eligible securities through qualified institutions placement in terms of Chapter VIII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended (SEBI ICDR Regulations).

Earlier, in order to undertake a QIP, a listed company was required to be in compliance with the MPS Requirement. SEBI, vide its notification dated 12 February 2018, has amended the SEBI ICDR Regulations to supplement the Circular and done away with this requirement to eliminate ambiguity.

Analysis:

A QIP offers a quick and effective solution to listed entities to meet their funding requirements. Further, as per the SEBI ICDR Regulations, a minimum of 10% of eligible securities in a QIP is required to be allotted to mutual funds (this creates diversified public holding and a broader investor base). Therefore, allowing QIP to be used as a tool to meet the MPS Requirement would greatly aid listed companies in India.

  • Open Market Sale - Sale of shares held by promoters/promoter group up to two per cent of the total paid-up equity share capital of the listed entity in the open market, subject to five times’ average monthly trading volume of the shares of the listed entity.

As per the Circular, listed entities are required to announce details of such sale to the stock exchanges at least one trading day prior to the proposed sale. The details include the intention of the promoter to sell and the purpose of the sale; the details of promoter who proposes to divest its shareholding; total number of shares and percentage of the stake proposed to be divested; and the period within which the entire divestment process will be completed. The listed entity is also required to furnish an undertaking to the recognised stock exchange(s) obtained from the promoter(s) and promoter group that they shall not buy any shares in the open market on the date(s) on which the shares are being divested. This is to ensure that the promoter(s) and promoter group comply with all applicable provisions including that of the SEBI (Prohibition of Insider Trading) Regulations, 2015 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Analysis:

Nonetheless, a few ambiguities remain. While SEBI has allowed up to two percent sale by the promoter / promoter group, “subject to five times’ average monthly trading volume of the shares of the listed entity”, it is unclear how “average monthly trading volume” is to be calculated. It is unclear if the average monthly trading volume is intended to be for the last twelve months, for the last six months, or the trading volume for any other period. Further, SEBI has not clarified which stock exchange should be used to compute the trading volume. Taking an average of the trading volume for both stock exchanges would not be a right approach since the same shares are trading on different exchanges. Perhaps, the intention was to let the company choose the stock exchange on which it wishes to track its trading volume, at its discretion. We expect SEBI to release clarifications in this regard soon.

Comment

The Circular is a much awaited and welcome move by the regulator to ease the difficulties faced by the listed companies in meeting the MPS Requirement. The Circular complements SEBI’s circular issued on 10 October 2017 which noted that several listed companies remain non-compliant with the MPS requirement, and created enabling procedures for the stock exchanges to monitor as well as penalize non-compliances. The addition of commercially attractive methods such as a QIP and open-market sale would provide listed companies momentum in meeting the MPS requirement within the prescribed timelines.