GoI’s idea of prescribing a minimum float of 35% in listed companies held by public shareholders isn’t a bad one. But some serious issues need to be addressed before this is taken forward.
First, since public shareholding is the opposite of promoter shareholding, it’s important to look at the strange beast called ‘promoter’. A promoter is quite similar to a person in control of a company. However, the Securities and Exchange Board of India (Sebi) has introduced the concept of ‘promoter group’.
This artificially imports people into this category. So, certain immediate relatives are virtually bonded to this concept, whether they are part of the controlling group — a fluid concept used in most other countries — or not.
The concept of ‘promoter group’ almost overwhelmingly brings principles of liabilities, rather than of rights, with it. So, it’s not a desirable tag for anyone actually not in control of a company.
Second, declassification of promoters. How does one get out of the role of apromoter if one has stopped being a controlling person? According to Sebi regulations, a particular level of shareholding and shareholder approval from minority shareholders are required.
Shareholders often want more promoters, as they can go after them by way of personal liability, and may, therefore, vote against their declassification. If promoters have exited from control of a company, it is neither correct nor equitable to imprison them as promoters for life.
Third, permanent and inflexible as it is, the concept of promoter by itself is a major departure from that of a company being a separate legal entity from its shareholders. Various liabilities attached to a person — who sometimes is not even a shareholder as a 0% shareholder relative ‘promoter group’ —stretch this concept beyond bounds.
Fourth, India has a history of stock market booms and busts. But a large number of companies that raised capital from the markets through an initial public offering (IPO) in the late 1980s-mid-1990s became defunct. Nearly two decades later, many continue to be listed, since, until recently, it was near impossible to wind up a company in India in one lifetime. Combined with Sebi’s tough delisting norms, the controlling shareholder and management of companies that didn’t do well just left — while, for all regulatory purposes, they made no efforts at disclosure and other compliances.
Also, many small companies still alive today were listed on regional exchanges that died on them.
In the past few years, Sebi has gone after hundreds of companies, asking them to comply with minimum public shareholder norms that mandate a minimum 25% public float. For many defunct companies, Sebi has asked to offer their shares to the public, it’s like anon-functional car parked on the roadside for decades being told to move or be challaned.
To add to the woes, a simple sale of shares in the market was not considered good enough for selling promoter stake. Instead, convoluted and expensive processes were to be employed. After a particular date, not only were these companies and their management in trouble, but Sebi imposed punitive measures on their promoters, as well as on the promoters of these promoters, which included freezing of all shares of the promoter’s promoter in all companies.
Assume for a moment that there is no fraud involved, and the company that once manufactured, say, pagers simply stopped manufacturing them because the product itself became extinct. In such cases, not only was the law too harsh, but it also bore down on random decades-old shareholders. Selling shares in a company that has no underlying business serves no economic, or even moral, purpose.
As for the 35% public float, it seems to be a good idea because it makes the markets deeper, reduces control of the controlling shareholder and improves corporate governance. But mandating alarger public float where a promoter would like to hold on may result in fewer companies coming to market — even as this is somewhat mitigated by new norms on differential voting rights.
If GoI or Sebi is to indeed push for a 35% public float, it must first do three things. One, repeal the concept of promoter and introduce ‘controlling shareholder’. Declassification would then become irrelevant. Two, let dead companies out of the regulatory net and remove the freeze on promoter shares, while at the same time going after crooked controlling shareholders who have stolen money.
Three, let government companies comply with the minimum float and have the same rules as private ones. Sebi should aim for larger public shareholding with a carrot rather than using a crude stick.
The writer is managing partner, Finsec Law Advisors