On 24 July, 2018, SEBI released a Consultative paper on revision of provisions relating to re-classification of shareholder under Regulation 31A of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The revisions were proposed on the basis of discussions with stakeholders and recommendations of the Kotak Committee on Corporate Governance with a view to simplify and bring more clarity to this regulation. Based on feedback to the Consultative Paper, SEBI notified the SEBI (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2018 on 16 November 2018. The said Regulations, inter alia substituted Regulation 31A.

The following changes were made with respect to re-classification of any person as promoter / public:

• The disclosure of class shareholders forming part of extant Regulation 31A has been subsumed into regulation 31 by inserting sub-regulation (4) which states that all entities falling under promoter and promoter group shall be disclosed separately in the shareholding pattern appearing on the website of all stock exchanges having nationwide trading terminals where the specified securities of the entity are listed, in accordance with the formats specified by the Board.
• A single set of conditions applicable to all situations of re-classification of promoters as public shareholders, namely, where (i) a new promoter replaces the previous promoter subsequent to an IPO, (ii) an entity becomes professionally managed and does not have any promoters and (iii) one of the multiple promoters wishes to get reclassified.
• A uniform process containing clear stages to be followed by the listed entity and the promoters in all cases of promoter re-classification, namely:
  • Stage I – Re-classification to be permitted only upon the request of the promoter to the listed entity. Such request should include the rational for seeking reclassification and how the prescribed conditions for reclassification are satisfied;
  • Stage II – On receipt of request for re-classification from the promoter, the BoD is to analyze it and place the request, along with the Board’s views on it, before the shareholders for approval in a general meeting. The time gap between the date of BoD meeting and the general meeting should neither be less than three months nor should it exceed a period of six months;
  • Stage III – The re-classification request to be approved through an ordinary resolution in the general meeting. The specific promoter who has requested the re-classification, its promoter group and PACs are not to vote on such resolution.
• In all cases of re-classification, the specific promoter seeking re-classification as a public shareholder, its promoter group and PACs shall not:
  • Together hold more than 10% of the total voting rights in the listed entity;
  • Exercise control over the affairs of the listed entity directly or indirectly;
  • Have any special rights woth respect to the listed entity through forma/informal arrangements;
  • Be represented on the BoD;
  • Act as KMP;
  • Be a willful defaulter
  • Be a fugitive economic offender which has been defined, through insertion of regulation 2(ia) as an individual who is declared a fugitive economic offender u/s 12 of the Fugitive Economic Offenders Act, 2018.
• Only those listed entities who are compliant with minimum public shareholding requirement and have no shares suspended from trading and no outstanding dues to SEBI or stock exchanges will be permitted re-classification.
• With respect to cases of transfer of shares by way of transmission, succession, inheritance or gift, it is proposed that :
  • Immediately on such transfer, the inheritor shall be classified as promoter/person belonging to promoter group.
  • Subsequently, in case the inheritor, now classified as a promoter, proposes to seek reclassification of status as a public shareholder, it may do so subject to compliance with conditions specified above.
  • In case of death of a promoter, such person shall automatically cease to be included as a promoter subsequent to transmission of shares to an inheritor(s).
• The term “professionally managed company” may be replaced with the term ‘listed entities with no promoters’, where, due to reclassification or otherwise, the entity does not have any promoter.
• The concerned stock exchanges, upon receipt of the request from the listed entity, jointly decide on the application and allow modification or re-classification on being satisfied with the compliance of the abovementioned conditions.
• The following events are required to be disclosed by the entity to the stock exchanges within 24 hours from the occurrence of the event: (i) receipt of request for re-classification by the listed entity; (ii) minutes of the board meeting considering such request including the views of the board; (iii) submission of application for re-classification to stock exchanges and (iv) decision of the stock exchanges as communicated to the listed entity.
• Some of the existing conditions under Regulation 31A to continue, namely, that (i) if any public shareholder seeks to re-classify itself as promoter, it shall make an open offer ; (ii) relaxations applicable to companies whose resolution plans have been approved under the I&B Code; and (iii) relaxation of conditions by SEBI if it is satisfied about non-exercise of control by the outgoing promoter or its PACs.