SEBI: Suggestions on review of methods and timeline to comply with Minimum Public Shareholding requirements

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SEBI: Suggestions on review of methods and timeline to comply with Minimum Public Shareholding requirements

Tejasvi

@tejasvi

September 13, 2022

Public Policy

155

In view of the changing market dynamics, the Securities and Exchange Board of India (SEBI) felt a need to review methods and timeline to comply with the Minimum Public Shareholding (MPS) requirements under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).

Based on feedback from the Industry, we have provided the following inputs to SEBI:

Allowing promoters to sell shares through off-market sale – Currently, LODR Regulations require a listed company to comply with the MPS requirements specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957 (SCRR). The SCRR currently specifies nine methods by which a company can meet the MPS requirement, which includes open market sale by promoters/ promoter group up to 2%, issue of shares to public through prospectus, rights issue to public shareholders, bonus issue, amongst others. With a view to provide flexibility to listed companies, we have requested SEBI to allow promoters of listed entity to sell shares through off-market sale, up to a pre-determined percentage, to any identified buyers or institutional investors in public category. This will ease the process of achieving MPS by a company through promoter identified buyer in a phased manner.
Consideration of employee welfare trust for the purpose of MPS - Currently, a trust holding equity shares for implementing employee benefit scheme is not allowed to be categorised as ‘public’ for the purpose of computing the MPS. It is important to note that such trusts may be formed for implementing an employee benefit scheme and are not controlled by promoter/promoter groups. Instead, they are controlled by independent trustees who have no voting rights. Trusts with independent trustees, who are not linked to promoters in any manner, should be included for complying with the MPS norms, since employees (who are considered public) are the ultimate beneficiaries. This will provide an additional avenue to companies to comply with the MPS norms provided under LODR regulations.
Increase in the limit of sale of shares by promoters in open market for achieving MPS - One of the methods prescribed for achieving MPS is by way of sale of shares held by promoters/promoter group up to 2% of the total paid-up equity share capital of the listed entity in the open market. This is subject to five times the average monthly trading volume of the shares of the listed entity. We have requested SEBI to increase the cap for sale of shares in open market by promoter from 2% to 5% without any restriction on the average monthly trading volume. This will help companies to expeditiously meet the requirement of minimum public shareholding and comply with the regulatory requirement.
Timelines for achieving MPS – Currently, a listed company is required to achieve MPS of 25% within 3 years from the date of listing of shares. We have requested SEBI to increase the current timeline to achieve MPS from 3 years to 5 years. A timeline of 3 years may not be sufficient, and the sale of a huge number of shares within such a period has the potential to impact the share prices. To avoid this, it is requested that this time period be increased to 5 years.
Reduction in the requirement of MPS: As per Rule 19(2)(b) and Rule 19A of SCRR read with Regulation 38 of LODR regulations, all listed companies are required to maintain at least 25% public shareholding on a continuous basis. We have requested SEBI to evaluate whether the MPS percentage should be reduced from 25% to 20%. This will help the promoter led entities to exercise better control over the company. Further, provisions under SEBI regulations relating to identifying a material subsidiary, definition of promoter and promoter group etc. prescribes the limit of 20%. We have highlighted that globally, the requirement of MPS varies between 10-25%. In Singapore, the MPS requirement ranges between 12%-25% depending on the market capitalisation of the company. Similarly, Hong Kong regulations prescribe a range of 15-25% depending on the market capitalisation of the company. US regulations prescribe that 1.1 million shares should be held publicly.

We hope you find this update useful. For more information, kindly write to tejasvi@nasscom.in and garima@nasscom.in

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Tejasvi

Call for Inputs: SEBI's consul...

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