Sebi to launch consultation for promoter reclassification

Adopting a key non-legislative recommendation of the Financial Sector Legislative Reforms Commission (FSLRC) panel for overhaul of financial sector regulatory framework, the Securities and Exchange Board of India (Sebi) is launching a public consultation for framing rules to allow reclassification of promoters at listed firms looking to become public shareholders.

The new norms can have a significant impact on the way some merger and acquisition deals are structured, as also in cases involving corporate restructuring that take place due to disputes among members of business families or after settlements between rival corporates.

While the government is looking to implement many recommendations of FSLRC in days to come, it has asked regulators, including Sebi, to begin adoption of governance-enhancing and non-legislative suggestions made by this panel on a proactive basis.

Consequently, Sebi has decided to frame all its major policy decisions after a public consultation process, as suggested by the FSLRC, a senior official said.

“As the change in process of reform continues ... I have not the least doubt that a large number of these (FSLRC) recommendations will actually see implementation in the days to come,” Finance Minister Arun Jaitley said at a seminar organised by the BSE yesterday.

While Sebi has been framing most of its key regulations after a public consultation over the draft norms, it would now onwards follow this procedure for all policy matters having any significant implications for various market participants.

As part of the new procedure, Sebi would make necessary amendments to its existing regulations governing re-classification of promoters after finalising a policy in this regard pursuant to a public consultation process.

Among others, amendments might be required to the regulations governing takeovers, listing norms and the disclosure rules applicable to listed companies, the official said.

A discussion paper containing draft regulations for reclassification of promoter as public shareholders, which have been finalised after detailed deliberations by Sebi's Primary Markets Advisory Committee, would be soon put in public domain for comments from all stakeholders.

The paper would also detail the various scenarios and conditions under which a promoter or promoter group can be re-classified as a public shareholder.

At present, the regulatory framework does not prescribe any specific criteria for such re-classification, which Sebi feels is required to lend objectivity to the process of reclassification of promoters of listed companies as public shareholders under various circumstances.

One of the scenarios include an existing promoter group entering into an agreement with a new group of investors for sale of a substantial stake and expressing its intention to become a public shareholders after giving away all special rights and privileges enjoyed by them.

In another case, daughter of one of the promoters of a listed company gets married to a family member of a business rival and wants to re-classify her status as a public shareholder.

The other test case presented by Sebi involves a promoter deciding to sell a majority of his or her stake to a new strategic investor looking for a controlling stake, and then retaining a minority stake along with position of chairman.

The new norms would specify whether a reclassification can be permitted in such cases.

The other such scenarios encountered by the regulator include two family members, having jointly promoted various companies, deciding to go through a family separation.

The agreement involves one family member giving majority control to the other and the vice versa, and thereafter one promoter seeking public shareholder status in companies where he has given majority control to the other family member.

There can also be a case where a business family and promoter of a listed company decide to exit from the day-to-day operations and retain only a minority stake without any special rights while handing over the management to professionals.

The norms for whether such promoters, as also in other possible cases, should be allowed to reclassify themselves as public shareholders would be finalised after the detailed public consultation process, the official added.