By Arindam Ghosh, Partner – Khaitan Co Moin Ladha, Associate – Khaitan Co
As part of its review of the existing disclosure requirements and with a view to bring more transparency and efficiency in the governance of listed entities, SEBI has made certain amendments to the Equity Listing Agreement on 16 December 2010.
This is yet another attempt of SEBI to enhance the quality of continual disclosures. These amendments make the regulatory scenario as regards continual disclosures more recurrent as well as challenging. Post the amendment, companies in the process of being listed need to start complying with the shareholding pattern disclosure even before being listed. Existing listed companies would now have to make additional disclosures on conclusion of a restructuring transaction if it results in upward or downward change of 2% or more of its share capital. The promoters holding stake under the guise of depository receipts (DRs) would no longer find this a convenient option, since the amendment requires segregated disclosures of promoter and public holding.
The ambiguity remains as to how DR’s will now be treated. As there has been a segregation in the disclosures, the moot question is to ascertain whether the exclusion from public shareholding would only be limited to the portion of DRs held by the promoters.
While the amendment to clause 20 would help shareholders manage their cash flows better, amendment to clause 22 informs them in advance when they should expect the bonus shares.
Amendment to clause 5A acts as a welcome provision and lays down the procedure for dealing with physical share certificates which have remained unclaimed by any shareholder either due to insufficient / incorrect information or for any other reason. This attempts to address the difficulties faced by companies which at the time of a public issue or any other issue had outstanding shares in physical mode.
The minimum public shareholding as per the SCRR has been raised to 5% in all listed companies with a view to prevent manipulation of share prices and ensure wider distribution of shares amongst large number of shareholders essential for the sustenance of a continuous market for listed securities. Such wider distribution was to provide liquidity to the investors, ensure fair price discovery and make the regulations consistent with the practices followed globally. This also did away with the relaxed provision for certain listed companies to maintain minimum level of public shareholding at 10% and brought all listed companies within the same fold.
Amendment to clause 40A puts to rest certain questions raised by the mandate issued by the Government in June 2010 requiring all listed companies to achieve at a 25 % public shareholding, by annually increasing 5%. The amendment to SCRR lets the public shareholders have a say in major decisions, like mergers, buybacks or delisting.
With the imposition of the condition on initial listing, pricing assumes more importance and becomes a key ingredient to the success of the offer. Now shares not only have to be offered but also allotted to the public at the required percentage as mentioned.
However, there can be various instances where obstacles would be faced in such compliance for instance (a) by promoters of companies that have pledged their shares; and (b) sectors in which FDI is restricted, example insurance companies (FDI capped at 26%), unless the government allows an increase in overseas ownership limits, compliance will be difficult. In most insurance joint ventures, foreign companies hold the maximum 26% stake, with the remaining 74% being held by the domestic promoter. Under company law, a 26% stake gives an entity the power to block any special resolution and foreign insurers will lose board power if their stake goes below the current level. With foreign partners unwilling to dilute their stakes below 26%, (since most have entered the business in anticipation of the limit being bumped up), the local partners will be forced to reduce its stake to 49% to meet the new norms. That could create its own complications since under Indian company law, a 51% stake ensures ownership.
Also while the amendments require raising the public shareholding by 25% in the next three years it is quite unclear whether the depth of the Indian market is adequate to absorb the stream of securities offerings that are likely to be initiated. This might cause undue pressure on the regulators and the capital market.
The executives and authorities have a reasonable cause to worry since the amendment is sudden, abrupt and prescribes mandatory compliances. Lack of preparedness will subject executives and authorities to undue pressure which would otherwise have been unexpected. This amendment also contradicts the existing guidelines like lock -in on promoter shareholding and restriction on fund raising routes. There could also be absurd scenarios wherein sick companies would attempt compliance of the regulations having no takers for their shares. There also seems to be no clarity as to how pre-IPO shares issued to PE funds would be treated.
The amendment also increases the possibility of delisting as companies may not be able to meet these stringent requirements. Instead of going through the rigors of making a public issue or being in contravention facing a penalty, they may just de-list the company.
The importance media plays in brand creation and the menace of “Private Treaties” have finally caught the eye of SEBI. Under the ad-for-equity business model a company buys ad space in newspaper/ television in lieu of its shares. These agreements between the media and the company are usually known as ‘Private Treaties’. Details of such treaties would now have to be disclosed to the stock exchange. This would inevitably bring in transparency in the reporting of news in relation to a company by media houses having stake in such company and would get them thinking twice before making any comments.
SEBI has set the clock ticking and all listed companies will have to set up and maintain functional websites containing basic information, details of statutory filings and information in relation to agreements with media companies by April 2011. The website must also provide financial information, shareholding pattern, compliance with corporate governance, contact information of the designated officials of the company who are responsible for assisting and handling investor grievances.
The viability of these idealistic amendments will be determined in time to come. However SEBI will have to tackle bottlenecks like creative structures to get around the minimum public shareholding and disclosure requirements.