The Securities and Exchanges Board of India ("SEBI") has vide the order dated June 4, 2013 ("Order") issued directions to the promoters of 105 companies that failed to ensure compliance with the minimum public shareholding requirement under the Securities Contracts Regulations (Rules), 1957 ("SCRR") within the stipulated deadline of June 3, 2013. The defaulting companies include Adani Ports and Special Economic Zones Limited, Tata Teleservices (Maharashtra) Limited, Hindustan Breweries and Bottling Limited, Videocon Industries Limited, Best Eastern Hotels Limited, Chettinad Cement Corporation Limited, Mudra Lifestyle Limited and Omaxe Limited1.

BACKGROUND

The requirement to maintain a minimum public shareholding of 25% of each class or kind of equity shares or convertible debentures issued by a listed company was always provided under Rule 19(2)(b) of SCRR2. Minimum public participation in listed companies has always been advocated by the regulators as this ensures liquidity in the market and discovery of fair price. Further, the availability of requisite floating stock ensures reasonable market depth and reduces susceptibility of listed securities to market manipulation.

In furtherance of the abovementioned objectives, SEBI amended Rule 19(2)(b) of SCRR and added Rule 19(A)3 to the SCRR vide the Securities Contracts (Regulation) (Amendment) Rules, 2010 thereby expressly obligating all listed companies to maintain at all times at least 25% of minimum public shareholding. SEBI also obligated all non-compliant listed companies to increase their public shareholding to 25% by June 3, 2013 through any of the following methods prescribed by SEBI:

  1. Issuance of shares to the public through prospectus;
  2. Offer of sale of shares held by promoters through prospectus; or,
  3. Offer for sale by promoters on the floor of stock exchanges.
  4. Institutional Placement Programme ("IPP")
  5. Rights issue/bonus issue to public shareholders, with promoters and promoter group shareholders forgoing their rights entitlement/bonus entitlement,
  6. Any other method as approved by SEBI on a case to case basis.

Based on the information provided by the National Stock Exchange ("NSE") and the Bombay Stock Exchange ("BSE"), SEBI concluded that 105 companies had failed to achieve the minimum public shareholding requirement by June 3, 2013 as required under the provisions of Regulation 19(2)(b) and Regulation 19(A) of the SCRR. SEBI has attributed the non-compliance to the promoters/ promoter group and directors of such defaulting companies. It is SEBI's view that promoters/ promoter group take advantage of their excess shareholding to the disadvantage of the public shareholders. Further, such non-compliance by some companies puts the promoters/promoter groups of compliant companies at a disadvantageous position in comparison to the promoters/ promoter group of the non-compliant companies.

ORDER

In view of the situation prevailing in the specified list of companies, SEBI with a view to restore the balance between public and non-public shareholding and eliminating the disproportionate advantage arising out of the non-compliance, directed the following actions, pending final order:

  1. Voting rights and corporate benefits like dividend, bonus shares, split, etc. in respect of the excess of the proportionate promoter/promoter group shareholding shall be frozen till compliance with the minimum public shareholding requirement has been achieved.

The maximum promoter shareholding permitted under SCRR is three times the minimum public shareholding, i.e. 75:25 or in a 3:1 ratio. If the public shareholding in a listed company is 10%, the promoter holding shall be impliedly three times the existing public shareholding i.e, 30%. The implication of the order is that the promoters or members of the promoter group shall not be able to exercise voting rights or claim dividend on the excess 60% of their shareholding in the listed company, until the minimum public shareholding requirement has been complied with.

In case of more than one entity in the promoter/promoter group in a company, the excess promoter holding for the purpose of taking action shall be computed on a proportionate basis. For illustrating the above, if there are three promoters; A, B and C with shareholdings of 45%, 35% and 10% respectively, the excess promoter holding of 60% shall be allocated as follows:

  1. :-(60% multiplied by [45%/45% + 35% + 10%]) = 30.00%
  2. :-(60% multiplied by [35%/45% + 35% + 10%]) = 23.33%
  3. :-(60% multiplied by [10%/45% + 35% + 10%]) = 06.67%

Thus, Promoters A, B and C shall not be able to exercise voting rights or claim dividend over 30%, 23.33% and 6.67% respectively of their shareholding in the non-compliant company.

  1. The promoters/promoter group and directors of non-compliant companies are prohibited from dealing in securities of such companies, whether directly or indirectly, except for the purpose of complying with the minimum public shareholding requirement, till such time these companies comply with the minimum public shareholding requirement.

Essentially, SEBI has not imposed a blanket ban on trade of securities by promoters/ promoter group so long as such trade is meant to comply with the minimum public shareholding requirement.

  1. The shareholders forming part of the promoter/ promoter group and directors of non-compliant companies are restrained from holding any new position as director in any listed company, till the minimum public shareholding requirements have been complied with.

It is noteworthy here that not only has SEBI restricted the promoter/ promoter group/ directors from holding new positions in the non-compliant companies, but the Order extends far enough to apply to any company listed on any stock exchanges in India.

SEBI has specifically clarified that the Order is without prejudice to its right to take any other action against the promoters of non-compliant companies including the following:

  1. Levying monetary penalties under adjudication proceedings;
  2. Initiating criminal proceedings;
  3. Moving scrip to trade-to-trade segment; and
  4. Excluding scrip from F&O segment.

The board/ audit committees of the non-complaint companies shall be required to submit a compliance report to the stock exchanges on which it is listed, detailing the extent to which compliance has been achieved and the efforts taken in that regard.

The Order also permits the promoters of defaulting companies to file a reply within 21 days of the order or seek personal appearance before SEBI.

ANALYSIS

SEBI's ultimatum to increase public shareholding to requisite level by June 3, 2013 had startled the promoters of non–compliant companies who were enjoying the benefits of excess shareholding till then. There were complaints that the time frame available was too short for offloading promoter shareholding especially because dilution could be done only through one of the modes prescribed by SEBI and the market was facing severe liquidity crunch. While promoters of some of the non-compliant companies made representations requesting SEBI to take a lenient view and extend the dead line for compliance, the promoters of other non-compliant companies initiated steps to ensure compliance before the deadline. The Indian market has thus far witnessed 44 offers for sale and 8 IPPs worth USD 9 billion in order to comply with the guidelines4.

Some of the key transactions for compliance with the norm are:

Offer for sale

  • DHL Express (Singapore) Pte. Ltd., promoter of Blue Dart Express Ltd completed the 'Offer For Sale' (OFS) on November 23, 2012, reducing the aggregate promoter shareholding from 81.035% to 75%5.
  • Promoter of DISA Holding Ltd. undertook OFS of up to 173,483 equity shares aggregating to 11.487% of the total paid up share capital of DISA Holding Ltd through sale on the separate window provided by the BSE Ltd for this purpose. The promoter shareholding has been reduced from 86.49% to 74.99%.
  • Promoters of the pharmaceutical company Fresenius Kabi Oncology Limited completed a successful offer for sale to lower promoter holding by around 8% of the share capital of the company.
  • Promoters of Honeywell Automation successfully brought down their shareholding in the company from 81.24% to 75% through an OFS on December 14, 2012.
  • The promoters / promoter group of Monnet Project Developers Ltd had Offered for Sale (OFS) 1,20,000 equity shares held by them, thereby bringing down the total promoter holding to 54.98%.

Bonus issuance

  • Pentokey Organy India Ltd, which had a promoter stake of 83.15% till the September quarter, undertook a bonus issuance of shares to non-promoter shareholders of the Company in the ratio of 2:3 i.e. 2 equity shares for every 3 equity shares held. The company is now in compliance with the minimum public shareholding norm.
  • Westlife Development Ltd., the holding company of Hardcastle Restaurants, issued in its board meeting dated December 12, 2012, bonus shares to its 34 public investors in the ratio of 1:1, to bring down promoter stake to 74.997%.
  • Gammon Infrastructure Projects Limited issued bonus shares to its public shareholders in the ratio of 1 (one) equity share, for every 34 (thirty four) equity shares held by the members. The promoter shareholding in the company has come down from 75.53% to 74.99%.

Institutional Placement Programme

  • Godrej Properties Ltd. successfully reduced the promoters' stake from 83.79% to 75% by way of IPP. Equity Shares were issued and allotted under the Institutional Placement Programme to the successful applicants at an issue price of INR 575. Please find attached the Offer Document filed with SEBI. Only Godrej has tried the IPP route till date.
  • Godrej Industries6 and Thomas Cook7 also resorted to IPP route to reduce the promoter shareholding in the company.

Approval of SEBI

  • Wipro Technologies took prior approval of SEBI for a member of the promoter group to transfer around 6,10,00,000 equity shares of the company to an irrevocable, independent trust by the name Pioneer Independent Trust that is not part of, or controlled by the promoter group. The promoter/promoter group shareholding in the company has been reduced to 74.99%.8

Some of the companies penalized vide the Order have already completed the process for increasing the minimum public shareholding in the companies. Some of the instances are as follows:

  1. Adani Ports & SEZ Limited has divested its 2.50% stake to institutional investors in order to comply with the SEBI norm and thereby the company has raised about INR 1,000 crore from the market9.
  2. The promoters of Starcom Information Technology Limited have undertaken the offer for sale through stock exchange mechanism for 6,86,005 equity shares of INR 10 each10.
  3. Videocon Industries has proposed to offload 200,000 promoter shares within three months of the order11.

What is interesting is to note is that SEBI has been steadfast in its stance of strict enforcement of the minimum public shareholding requirement. SEBI officials including the chairman Mr. U.K. Sinha had consistently warned of strict actions in case of default after June 3, 2013. The Order could be the first step by SEBI as it requires representatives of defaulting companies to file a response within 21 days of the order or seek personal appearance before SEBI. There is also an implicit warning in the Order that SEBI would not hesitate to impose further penal actions like monetary penalty, criminal proceedings etc. if the non-compliance continues.

With the deadline for Public Sector Undertakings to comply with the minimum public shareholding guidelines fast approaching on August 8, 2013, it would be interesting to see how SEBI would be dealing with the promoters of such companies12.