The June 2013 deadline for compliance by listed companies with the minimum public shareholding of 25% is looming closer. The deadline for compliance by public sector (government) listed companies to comply with the 10% minimum public shareholding will follow in August.
Over the last few months, several companies have already reduced their promoter shareholding to meet with these norms. This has been accomplished through various facilities provided by the Government and SEBI to achieve the minimum public shareholding norms. SEBI has also provided specific exemptions and dispensations in certain cases. The latest episode of The Firm has a comprehensive discussion on the manner in which companies have gone about reducing their promoter holdings and the various issues that have arisen in the process.
Despite a rush to achieve these norms, there will certainly be a significant number of companies that are unable to comply with them by the June deadline. SEBI has been steadfast in its stance that it will not extend the time period for compliance.
In these circumstances, a lawyer friend recently raised the issue of the possible consequences of non-compliance by listed companies. In order to consider this, we must note that the minimum public shareholding norms are embodied in Rule 19A of the Securities Contracts (Regulation) Rules, 1957 (SCRR) that was introduced by way of amendment in 2010. In addition, the listing agreement in clause 40A requires companies to comply with Rules 19(2) and 19A of the SCRR.
The first consequence of non-compliance would be a delisting of securities on account a breach of the listing agreement. As we have repeatedly argued before, this would be a paradoxical tool to ensure compliance with listing norms. In case of a delisting, it is the public shareholders who would suffer due to a loss of liquidity and exit opportunity in the markets. Public shareholders would be penalized by failure of the company and promoters to comply with norms that are intended to benefit them. While this regulatory response exists on paper, it must be exercised cautiously after considering the extensive impact it may have.
The second consequence would be penalties levied on the non-compliant companies. Section 23E of the Securities Contracts (Regulation) Act, 1956 (SCRA) provides that in case of failure to comply with the listing conditions, SEBI could impose a penalty not exceeding Rs. 25 crores (rupees 250 million). SEBI could potentially invoke this power in case the public shareholding norms are not met by the deadline.
While these measures exist on the statute books, it is a different matter as to how they might be exercised by SEBI in practice. The past track record indicates certain difficulties in the implementation of corporate and securities laws. For example, when stringent measures of corporate governance were to be introduced by amendments to clause 49 of the listing agreement in 2004, the implementation was delayed several times and they came into effect only on January 1, 2006. These include a tighter definition of board independence and the like. Even thereafter, when SEBI tried to enforce the board independence requirements against several listed companies, primarily in the public (government) sector, it had to drop them subsequently.
To make a comparison, during October and November 2008, SEBI passed a series of orders involving the lack of appointment of the requisite number of independent directors to several government companies, viz. NTPC Limited (Oct. 8), GAIL (India) Limited (Oct. 27), Indian Oil Corporation Limited (Oct. 31) and Oil and Natural Gas Corporation Limited (Nov. 3). The principal ground for dropping the action was that in the case of the government companies involved the articles of association provide for the appointment of directors by the President of India (as the controlling shareholder), acting through the relevant administrative Ministry. SEBI found that despite continuous follow up by the government companies, the appointments did not take effect due to the need to follow the requisite process and hence the failure by those companies to comply with Clause 49 was not deliberate or intentional.