ET Explainer: Debating promoter reclassification
Sebi committee discusses but ultimately rejects proposal to reclassify promoters in listed companies, maintaining the 10% threshold rule. Companies seek changes to allow for reclassification of non-involved family members. Experts highlight concerns over potential misuse and urge case-by-case evaluations.
A Sebi-appointed expert recently discussed a proposal to reclassify promoter or entities in . After debate, the panel rejected it. A look at what it means:What are the existing provisions for ?
According to regulations, if a promoter or a promoter entity must be reclassified as a public shareholder, the promoter group's total voting rights should not exceed 10% of the total equity in the company.
What did companies and ask for?
Companies and lobby groups had suggested removing the rule about "together holding more than 10%", or they requested for this to be increased to 25%. For example, if a promoter's siblings or children hold small stakes, say 2%, and seek reclassification as a non-promoter due to non-involvement in the business, they should be allowed to be reclassified as a non-promoter or public shareholder irrespective of the promoter group stake.
Why did companies want this rule changed?
When a family member runs a business independently, other relatives prefer not to be liable for the compliances and liabilities imposed on the promoter group. Many of these shareholders are merely relatives and not part of the company's operations. "This is an unfortunate requirement, as promoters' relatives, even if married and often having small holdings, living separate lives, and not involved in the day-to-day management of the company, cannot be recategorized as public shareholders," said Ketan Dalal, managing director of .
Why did the expert committee reject the suggestion?
The committee felt that any relaxation in the thresholds would allow some errant promoter or promoter group entities to get reclassified as public shareholders to escape the scrutiny of transactions. This would result in a violation of (RPT) rules.
What happens now?
Many of these relatives of promoters who do not want to be tied down by regulations could end up selling their stakes in companies. Problems could crop up in the event of disputes between promoters and these family members. "There may or may not be any family settlement, and there needs to be clarity of such reclassification, at least in such cases," said Dalal. According to Farida Dholkawala, partner, Desai & Diwanji, "Each matter would have to be evaluated on a case-to-case basis in view of the facts."
What did companies and ask for?
Companies and lobby groups had suggested removing the rule about "together holding more than 10%", or they requested for this to be increased to 25%. For example, if a promoter's siblings or children hold small stakes, say 2%, and seek reclassification as a non-promoter due to non-involvement in the business, they should be allowed to be reclassified as a non-promoter or public shareholder irrespective of the promoter group stake.
Why did companies want this rule changed?
When a family member runs a business independently, other relatives prefer not to be liable for the compliances and liabilities imposed on the promoter group. Many of these shareholders are merely relatives and not part of the company's operations. "This is an unfortunate requirement, as promoters' relatives, even if married and often having small holdings, living separate lives, and not involved in the day-to-day management of the company, cannot be recategorized as public shareholders," said Ketan Dalal, managing director of .
Why did the expert committee reject the suggestion?
The committee felt that any relaxation in the thresholds would allow some errant promoter or promoter group entities to get reclassified as public shareholders to escape the scrutiny of transactions. This would result in a violation of (RPT) rules.
What happens now?
Many of these relatives of promoters who do not want to be tied down by regulations could end up selling their stakes in companies. Problems could crop up in the event of disputes between promoters and these family members. "There may or may not be any family settlement, and there needs to be clarity of such reclassification, at least in such cases," said Dalal. According to Farida Dholkawala, partner, Desai & Diwanji, "Each matter would have to be evaluated on a case-to-case basis in view of the facts."
Source: Stocks-Markets-Economic Times
