SEBI (Securities and Exchange Board of India) issued a circular on February 3, 2023, which supersedes all earlier circulars issued by SEBI, specifying methods of achieving minimum public shareholding. The circular rationalized certain existing methods for a listed entity to achieve minimum public shareholding and introduced two additional modes for a listed company to comply with minimum public shareholding requirements. In this article we will have a look upon SEBI circulars on achieving minimum public shareholding.
Securities and Exchange Board of India
The Government of India established the Securities and Exchange Board of India (SEBI) as a statutory regulatory agency in 1992 to oversee the Indian securities market and safeguard the interests of investors in securities.
SEBI has the authority to oversee and carry out tasks like approving stock exchange bylaws, inspecting the books of financial intermediaries like banks, requiring regular returns from stock exchanges, and compelling certain companies to list on one or more exchanges.
Previous circulars issued by SEBI describing minimum public shareholding requirement
Two circulars issued by SEBI are:
- Circular issued on 30 November 2015: Below are the number of methods specified by SEBI for achieving minimum public shareholding requirement:
- Public issue of shares via a prospectus.
- Offer for sale of promoter-owned shares to the public through a prospectus.
- Sale of promoter-owned shares through the secondary market in accordance with SEBI circular CIR/MRD/DP/05/2012 dated February 1, 2012.
- Institutional Placement Programme (IPP) in accordance with Chapter VIIIA of SEBI (Issuance of Capital and Disclosure Requirements) Regulations, 2009.
- Rights Issue to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, that may arise from such issue.
- Bonus Issues to Public Shareholders that may result from such Issue, with Promoter/Promoter Group Shareholders Waiving Their Rights to Equity Shares.
- Any other method as may be approved by SEBI on a case-to-case basis.
The listed entities may contact SEBI with the necessary information for this purpose. From the date of receipt of the proposal or the date of receipt of any further information requested from the company, SEBI will make every effort to announce its decision within 30 days.
- Circular dated 28 February 2018: SEBI added two methods for achieving minimum public shareholding:
- Open market sales: Sale of shares held by the promoters/promoter group up to 2% of the listed entity’s total paid-up equity share capital on the open market, subject to five times the listed entity’s shares’ average monthly trading volume.
- Qualified Institutions Placement: In accordance with Chapter VIII of the Securities and Exchange Board of India (Issuance of Capital and Disclosure Requirements) Regulations, 2009, allotment of eligible securities through qualified institutions placement.
What is the rationale behind lowering promoter share ownership to 75% or mandating a minimum of 25% public ownership?
For entities that have listed their equity shares on a stock exchange, Regulation 38 of SEBI (Listing Obligations and Disclosure Requirements), Regulations 2015 read with Rule 19(2)(b) and Rule 19A of Securities Contract Regulation Rules 1957, makes it mandatory to maintain a minimum public shareholding of 25%. This will guarantee market equity balance between promoter and public ownership and lower market volatility.
SEBI’s new strategies for achieving the minimum level of public shareholding
The minimum public shareholding can be reached through several SEBI-prescribed methods. The MPS requirements for listed companies were revised and two new compliance options were announced in a circular published on February 3, 2023. The circular issued on February 3, 2023, supersedes all earlier circulars issued by SEBI. The two additional methods are:
- An increase in public holding because of the exercise of options or an allocation under an employee stock option plan, subject to a cap of 2% of the listed entity’s paid-up share capital and other requirements specified in the circular.
- The transfer of shares by the promoter or promoter group to an exchange-traded fund run by a mutual fund registered with SEBI, provided that the transfer is limited to a maximum of 5% of the paid-up share capital of the listed firm and complies with all other requirements outlined in the Circular.
The circular also mentions that SEBI may consider any other method of achieving minimum public shareholding on a case-specific basis, subject to certain conditions.
Why did SEBI come up with more ways to achieve the minimum public shareholding?
SEBI introduced additional methods for achieving minimum public shareholding in February 2023. The rationale behind this was to provide more options for listed entities to comply with the minimum public shareholding requirement of 25% and to rationalize certain existing methods.
SEBI received representations from listed entities and other stakeholders requesting relaxation from compliance with the conditions specified in the existing methods and approval for using non-prescribed methods to achieve minimum public shareholding compliance. That’s the reason SEBI came up with the new circular for achieving MPS.
How does SEBI’s new minimum public shareholding measures affect listed entities?
SEBI’s decision to introduce additional methods for achieving minimum public shareholding affects listed entities in the following ways:
- Listed entities now have more options to comply with the minimum public shareholding requirement of 25%.
- The introduction of additional methods is aimed at facilitating quicker and cheaper compliance, ensuring market balance of promoter and public shareholding, and reducing volatility in the market.
- Listed entities can now adopt rights issue of shares to public shareholders and bonus issue to public shareholders to comply with the minimum public shareholding requirements.
- Promoters will have to forgo their entitlement to equity shares that may arise from such issuances.
- In case of increase in public holding pursuant to exercise of options and allotment of shares under an employee stock option (ESOP) scheme, this is subject to a maximum of 2%.
How does SEBI’s ESOP issuing, and exchange traded fund transfer strategies achieve minimum public shareholding?
Following are the ways in which SEBI’s ESOP issuing and exchange traded fund transfer strategies achieve minimum public shareholding:
- A maximum of 2% of the listed entity’s paid-up equity share capital may be diluted, according to SEBI.
- Any employee stock option plan (ESOP) that is proposed must comply with the Securities and Exchange Board of India and Share Based Employee Benefits and Sweat Equity Regulations, 2021, if it is to be used to increase public shareholding.
- Additionally, it is specified that no shares under these schemes will be allocated to the promoters or promoter group.
What compliances are needed if a promoter or promoter group wants to transfer shares to ETF to meet minimum public shareholding requirements?
The listed company must notify the stock exchange(s) where its shares are listed of the following information at least one trading day before the intended transfer:
- The promoter’s or promoter group’s plan to sell or otherwise dispose of shares in the listed firm, as well as the rationale for the sale.
- The promoter’s or promoter group’s details.
- The total number of shares and percentage of shareholding planned to be transferred.
- Information about the ETF to which the promoter or promoter group proposes to transfer shares.
- The listed entity must also obtain a commitment from members of the promoter and promoter group that they will not subscribe to units of the ETF in which shares have been transferred by the promoters or promoter group entities to comply with the MPS.
Can a company use a variety of strategies to get the required minimum public shareholding?
From what we can see, most companies have used one of the strategies to reach their minimal public shareholding. None of the strategies for diluting ownership have been used together.
It would be preferable if only one of the aforementioned strategies was used to reach the required level of public shareholding. Remember that any reduction in shareholding must also comply with the other SEBI regulations that apply, including the SEBI LODR, SEBI PIT, and SEBI SAST.
Can a company propose another technique for minimum public shareholding?
By its circular dated February 3, 2023, and all its previous circulars, SEBI has said that it may, on a case-by-case basis, consider any alternative way of obtaining a minimum public shareholding. It has also been noted that the listed entity must apply to the Board with all necessary information to get permission in advance.
In this case, SEBI would try to express its choice within 30 days of either receiving the proposal or the listed entity’s requested further information. Therefore, entities that do not want to use the procedure may apply to SEBI for a reduction in shareholding using any method that is appropriate. However, the SEBI-recommended approach would only be applicable to a certain entity and could not be used by other entities.
Consequences of non-compliance with minimum public shareholding requirements as per SEBI
Non-compliance with minimum public shareholding requirements as per SEBI can lead to various consequences, including:
- Penalty: SEBI can impose a penalty on the non-compliant listed entity.
- Freeze on promoter’s voting rights: In case of non-compliance, SEBI can freeze the voting rights of the promoter and promoter group over their shares in the listed entity until compliance is achieved.
- Delisting: SEBI can initiate delisting proceedings against the non-compliant listed entity.
- Other actions: SEBI can take other actions against the non-compliant listed entity, such as prohibiting it from accessing the capital market or restricting its ability to raise funds.
Takeaway
It has been greatly anticipated and is very much appreciated that the SEBI has decided to release the Circular. If all goes according to plan, this will make it much simpler for listed companies to comply with the MPS requirements. It included profitable strategies that would provide listed companies the push they require to achieve the MPS requirement within the allocated time frames.
