Regulator ready with action plan against companies failing to increase their public holding to at least 25%
Mumbai: At least 80 companies face the prospect of stiff penalties by the capital market regulator for failing to ensure 25% public shareholding by the 3 June deadline.
By Monday, 85 firms listed on BSE Ltd will complete dilution of their promoter holding to the stipulated level and eight offers for sale, or OFS, issues are likely to go through. Yet, 84 private firms could be left non-compliant with the 25% public holding norm.
“Two of the 84 non-compliant companies have already started the voluntary delisting process," said a BSE spokesperson. Voluntarily delisted firms will not be held liable for non-compliance.
To help firms comply with the norms, the Securities and Exchange Board of India, or Sebi, fast-tracked clearance of applications for public issues to reduce promoter holdings.
“Sebi has cleared some applications in just an hour’s time. For instance, on Friday, Sebi received applications of some firms for OFS at 5.30pm. The Sebi officials worked much faster and the applications were cleared by 6.30pm. What more can Sebi do to help companies comply with the deadline?" said a person familiar with Sebi’s policymaking and approval processes, declining to be identified.
The regulator is ready with its action plan on non-compliant firms, this person said.
Sebi declined to comment.
Companies failing to increase their public holding to 25% will be penalized for violating the listing agreement norms. Breaching listing agreement norms may lead to compulsory delisting, suspension of trading, monetary fine, prosecution, a curb on voting and dividend rights, and so on.
In the wake of market volatility and to prevent concentration of wealth in the hands of Indian promoters, former finance minister Pranab Mukherjee on 4 June 2010 directed listed companies to raise the threshold for non-promoter, public shareholding to 25% from 10%.
Later, the government changed the rule for state-run firms and ordered them to have at least 10% public holding by August 2013.
A large shareholder base ensures strict monitoring by the regulator and less scope for price manipulation. It also prevents promoters from prejudicing the interest of public investors. Under the new norms, all private firms have to ensure that if the public holding falls below 25% due to any share transaction it has to be enhanced to 25% within a year from the date of such sale.
“A large number of countries in the world have adopted the figure of 25% public float. The pros of the larger public float are clear, that there is sufficient public shareholding of the company and, therefore, the company is run more professionally, the public has a louder voice and the shares are more liquid making price discovery more accurate," said Sandeep Parekh of Finsec Law Advisors.
Sebi chairman U.K. Sinha has warned several times that a public-holding below 25% will be considered as violation of listing agreement norms and dealt with seriously.
“For non-compliance, the actions Sebi may take could range from moving the stock to the trade-to-trade segment to something draconian such as issuing directions to give up the excess shareholding into an account set up by Sebi to have them sold off," said Somasekhar Sundaresan, partner, J. Sagar Associates, a national law firm. “Indeed, each action taken has to be justified and would have to stand the test of an appellate review."
The regulator, however, is least likely to enforce compulsory delisting on non-compliant firms as that may hurt public shareholders more than the promoters.
“We will give due weightage and consideration for the efforts made by a company," Sinha said in a recent interview. “For instance, say there are two companies and both were at 5% public shareholding in the beginning. If one company has come to 20% and the other has remained at 5%, I think justice demands the first one should be given a different treatment. So, these will be the two parameters on which we will be deciding our action."
“What differential treatment may be given is for Sebi to determine—it would necessarily have to be reasonable and rational in doing so, taking only relevant factors and ignoring irrelevant factors. It is not going to be easy considering that even with three days to go, amendments and clarifications are still flowing in," said Sundaresan.
The most likely action for non-compliance will be a monetary penalty against select people and a direction issued to the company and its promoters to comply within a time-bound period, said Parekh of Finsec Law Advisors. “The latter will necessary have to be backed up by consequences if it is supposed to have teeth."
“Sebi will see the final list on Monday and discuss on Monday or Tuesday evening what actions can be taken (against) which promoters," said the unnamed person mentioned earlier.
Sebi has taken several steps to help companies reduce their promoter holding, but much of this came late giving firms less time to comply with the norms unless they opted to sell their shares through the traditional follow-on public offerings.
In February 2012, the regulator created two new routes to dilute promoter holding—institutional placement programme, or IPP, and OFS through exchanges. Later in August 2012, Sebi allowed companies to enhance public holding also through rights and bonus issues.
The OFS and IPP norms, too, were relaxed in terms of disclosure, margin requirement and cooling-off period between two successive issues. On Thursday, to make it even easier for companies, Sebi allowed companies to float an OFS with just a day’s notice.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!