Promoter becoming a public shareholder: SEBI spells out reclassification norms

MUMBAI, DECEMBER 15:

The Securities and Exchange Board of India, which has spelt out the conditions under which promoters of companies may be reclassified as public shareholders, has provided five situations which may result in a request for reclassification.

 

Acquisition by another

The first is that of promoters who seek reclassification after the company has been acquired by another entity.

The promoters request the company to terminate the shareholders agreement and want to classify themselves as public shareholders post termination of shareholding agreement. Then, informing the developments to stock exchanges, besides giving up their special rights and privileges by an amendment to the Articles of Association of the company after obtaining shareholders’ consent through postal ballot.

 

Post daughter marriage

The second arises when a company seeks reclassification of the status of the promoter’s daughter post her marriage with a family member of a business competitor.

 

Entry of strategic investor

Entry of a strategic investor who picks up 50 per cent in the company and the promoter who earlier held 70 per cent stake in the company is now reduced to 25 per cent and the promoter still continues to be the chairman according to agreement.

This gives rise to a situation for seeking reclassification, as the control of the company has changed hands.

 

Family separation agreement

Two family members who have jointly promoted several companies enter into a family separation agreement due to a dispute which is registered.

According to the agreement, the first will transfer majority of its holding in some of the companies to the second and the second will transfer majority of its holding in the remaining companies to the first entity.

In such a case, both would desire to be reclassified as public shareholders in those companies where they do not hold a majority stake.

 

Pruning stake, rights

Finally, the Infosys example — company is run initially by family members.

However, they want to exit from the day-to-day operations of the company and would hold a minor stake in the company handing over the management of the company to professionals while giving up their special rights in the company.

 

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