The market regulator has made it difficult to exploit the route that ArcelorMittal Netherlands BV used to try and become eligible as a bidder for Essar Steel Ltd. under the insolvency code.
The Securities and Exchange Board of India has made it mandatory to get shareholders' approval if promoters seek to reclassify themselves as public shareholders, according to board agenda papers published on its website on Oct. 16. SEBI approved the norms in its board meeting on Sept. 21. Such a shareholder approval was earlier required only in select cases.
SEBI said it believes shareholders' consent for reclassification is critical as many investors base their investment decision on the profile of promoters.
The change comes after ArcelorMittal reclassified itself as a public shareholder of Uttam Galva Steels Ltd., a company that had defaulted on debt. Section 29 of the Insolvency and Bankruptcy Code bars promoters of such companies from bidding for stressed assets. ArcelorMittal pared its stake in an off-market sale to become eligible. Shareholders of Uttam Galva then moved the Securities Appellate Tribunal against the reclassification.
SEBI's new rules will make such a sudden change difficult. “All cases of re-classification of promoters/persons belonging to the promoter group shall be required to be placed by a listed entity before its shareholders in a general meeting along with the views of the Board and approved through an ordinary resolution,” it said. Promoters and related shareholders seeking reclassification won't be allowed to vote to avoid conflict of interest.
To be sure, the changed norms cannot be applied retrospectively.
Stock exchanges will consider an application for reclassification if:
- Promoters and persons related to them do not hold more than 10 percent of voting power.
- Have direct or indirect control over the affairs of the company.
- Do not have any special rights through shareholder agreements.
- Are not a wilful defaulter.
- Are not a part of the board and act as key managerial personnel for three years post-reclassification.
- Should be complaint with 25 percent public float norms
- Shares are not delisted and are not tagged as a defaulter by exchanges and SEBI.
- Reclassification will be allowed only if the promoter entity seeking reclassification makes a request to the listed entity.
Cooling Period
The regulator introduced the concept of a “minimum cooling off period of three months” between the board meeting that approves such a reclassification request and the shareholders' meeting called to vote on the reclassification.
“This is to enable that shareholders take a considered decision,” said the market regulator. By putting in the clause, the regulator seeks to ensure that such reclassification is a planned exercise and not done hastily.
- Entities seeking reclassification will need to disclose to bourses:
- When they receive a request for reclassification from the promoter(s);
- Minutes of the board meeting considering such request including views of the board.
- Submission of application for reclassification of status as promoter/public by the listed entity to the stock exchanges.
- Bourses' approval or denial of reclassification.
Professionally Managed Firms
Given that today many companies have diverse shareholding with institutional and private equity money, SEBI will tweak the listing regulations to call such companies as “listed entity with no promoter”.
This was a long-standing demand of professionally managed firms.
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