Thursday, July 4, 2013

SAT Order on Minimum Public Shareholding Norms

The Securities Appellate Tribunal issued its order in the case involving compliance of the public shareholding norms in Gillette India Limited. Gillette had filed an appeal against an order of the Securities and Exchange Board of India (SEBI) rejecting Gilette’s proposal for compliance with the public shareholding norms. However, SAT dismissed Gillette’s appeal in an order that extensively considers the background and rationale for the public shareholding norms in arriving at a decision.

The facts are that Procter & Gamble India Holdings BV (P&G) is a promoter of Gillette holding 75.9% voting rights. The Poddar group is the Indian promoter with 12.9% voting rights. The total promoter holding is hence in excess of the 75% permitted by the public shareholding norms. Therefore, Gillette’s proposal was that the Poddar group would first transfer 4% of its shares to P&G. Thereafter, the Poddar group would be classified as an ordinary public shareholder as it would lose all its rights as a promoter (including by virtue of termination of rights under the shareholders agreement and articles of association). This approach was resisted by SEBI on the ground that this militates against the spirit of the public shareholding norms in that the promoter holding would in fact be increased rather than diluted in this process.

In arriving at its decision agreeing with SEBI’s views, SAT paid significant regard to the history of the minimum public shareholding requirement so as to bring out the true import and object of the rule. Although by virtue of a circular dated August 29, 2012, SEBI has been authorised to approve a specific solution on a case-by-case basis in exceptional situations if one of the prescribed methods of maintaining public shareholding was not available, SAT decided to interpret this power of SEBI in a narrow manner. For example, SAT noted:

In our opinion, the Appellant seems to have overlooked, whether deliberately or inadvertently, the fact that the underlying philosophy behind the requirement of a minimum public holding of 25% is prevention of concentration of shares in the hands of a few market players by ensuring a sound and healthy public float to stave off any manipulation or perpetration of other unethical activities in the securities market which would  unfortunately be the irrefragable consequence of the reins of the market being in the hands of a few.

In its order, SAT has also clarified its preference for compliance with the minimum public shareholding norms through one of the prescribed methods rather than through more complex methods such as the one proposed in that case.

While SAT’s reasoning for its conclusion is understandable, it is likely to create practical difficulties at least on one count. Implicit in SAT’s reasoning is its hesitation to recharacterise the Poddar group as a public shareholder rather than as a promoter. This suggests that once a person has been indicated as a promoter of a listed company, it is a tall order to shed this characteristic and the burden appears quite high on the part of the person seeking to reclassify itself such that it is no longer a promoter. This adds to the lack of clarity that pervades the definition and description of the concept of a promoter.

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