RINGSIDE VIEW. Change in promoter status: Provide window for minority shareholders to air their views

Several companies, including some prominent ones, have seen their promoters giving up their status as ‘promoters’ in listed companies. Instead, they prefer to be classified in the ‘public shareholders’ category, to lead a hassle-free life sans regulatory headaches.

Sun Pharmaceutical, Adani Power, Adani Ports, Adani Enterprises, Bajaj Auto, HCL Infosystems, Crompton Greaves Consumer Electricals, Kaveri Seeds, Mercator, HFCL and 20Microns, among others, are the prominent ones under this list.

The watershed change in such reclassification occurred in October 2016, when the market regulator gave an informal guidance to Alembic Pharmaceuticals. The company had sought a guidance from SEBI on whether shareholders’ approval would be required to declassify promoters and whether the company may directly approach the stock exchanges for permission under their listing regulations for this move.

Alembic knocked on SEBI’s door, as five out of 25 persons of its promoter group had expressed their desire for re-classification from the promoter group to the public category, as these members command only an insignificant stake (less than 1 per cent) in the company and were not part of the day-to-day activities of the company.

“Our view is that the company may not be required to obtain approval of the shareholders for the proposed re-classification,” SEBI said in an informal guidance to the company.

This clarification opened the floodgates, as promoters of more such companies moved the stock exchanges to reclassify them as public shareholders. Several others are also in the process of approaching the stock exchanges for reclassification.

This is a welcome decision, as entities with minority stakes in companies should ideally not carry disproportionate clout. However, there should be a mechanism, where if any shareholder has any objections to the declassification, he/she is allowed to air his/her grievance. Exchanges can create a window (say, one month from the request received from promoters) for minority shareholders to raise their grievances. The bourses should take a decision only after considering these views.

Recently, the Uday Kotak Committee appointed by SEBI to look into corporate governance issues, came out with a recommendation on this issue. It stated that where there is no identifiable promoter/promoter group, the 1 per cent threshold to be able to classify the entity as professionally managed is too low. It argued for increasing this to 10 per cent for the following reasons:

a) From the listed entity’s perspective, if a promoter along with the group in aggregate holds less than 10 per cent, it is unlikely to be able to exercise de facto control.

From the promoter’s perspective, even after ceasing to be in control, a ‘promoter’ may want to continue as a financial investor with a shareholding of more than 1 per cent. In such cases, he/she should not be required to reduce his/her shareholding to 1 per cent or lower just to be declassified.

In addition, the SEBI LODR Regulations also do not deal with a situation where there are multiple and distinct parties classified as promoters, and one of them wishes to be reclassified.

The Committee is of the opinion that there ought to be a mechanism to enable such reclassification, to ensure that persons who may have been promoters but are no longer involved in day-to-day control and management and have a low shareholding, should have an “opt-out” option from being classified as “promoters.”