Reclassification of Promoter’s married daughters to public shareholder – SEBI’s informal guidance

The Securities Exchange Board of India (“SEBI”) vide its informal guidance dated June 10, 2020 has clarified to Mirza International Limited (“Mirza”), that the re-classification of the married daughters of Mr. Rashid Ahmad Mirza (“Promoter”), the promoter and managing director of Mirza, to a public shareholder under the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 (“LODR”) is not permissible under regulation 31A of LODR as the married daughters would hold more than 10% of the total voting rights of Mirza and their non-involvement in the management of Mirza is not a ground to be exempted from the definition of ‘promoter group’ under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR”).

Facts:

The Promoter’s shareholding along with his spouse Ms. Yasmin Mirza and son Mr. Shuja Mirza is 24.1% in Mirza. The Promoter wanted to gift some of his shares to two of his married daughters who lived independent lives and did not have any part or involvement in the management of Mirza and presently did not hold any shares of Mirza. Therefore, their name did not form part of the ‘Promoter & Promoter Group’ category per the shareholding pattern filed by Mirza with the stock exchanges per regulation 31 of LODR. Following the transfer of some of the shares from the Promoter to his daughters, their names would be included in the shareholding pattern of the Mirza under the ‘Promoter & Promoter Group’ category.

Thereafter, the daughters of the Promoter wish their names to be re-classified from the ‘Promoter & Promoter Group’ category to ‘Public category’ as they did not have any involvement in the management of Mirza and both were married and lived separate lives and that they did not desire to be bound by the restriction of trading window applicable to the ‘Promoter & Promoter Group’ merely by falling under the definition as such (“Daughters Re-classification”).

Applicants Arguments:

Mirza stated that regulation 31A(3)(a)(i) of LODR provides that ‘the promoter(s) seeking re-classification shall make a request for re-classification to the listed entity which shall include rationale for seeking such re-classification and how the conditions specified in clause (b) below are satisfied’.

Further, regulation 31A(3)(b) of LODR provides that ‘(b) the promoter(s) seeking re-classification and persons related to the promoter(s) seeking re-classification shall not

(i) together, hold more than ten percent of the total voting rights in the listed entity;
(ii) exercise control over the affairs of the listed entity directly or indirectly;
(iii) ….;
(iv) be represented on the board of directors (including not having a nominee director) of the listed entity;
(v) act as a key managerial person in the listed entity;
(vi) ….;

SEBI’s Analysis:

SEBI’s responded to Mirza in light of the Daughters Re-classification as follows:

Based on the definition of ‘promoter group’ under the ICDR, the daughters of the promoters are immediate relatives and are a part of the promoter group irrespective of the fact that they are married and living a separate life or that they do not have any involvement in the management of Mirza. Further, due to regulation 31A(6) of LODR[1], in case of gift of shares held by a promoter/person belonging to the promoter group, immediately on such event, the recipient of such shares shall be classified as promoter/ person belonging to the promoter group, as applicable.

Further, SEBI clarified that the conditions for re-classification of promoter group to public and the procedure are specified under regulation 31A of LODR. Regulation 31A(3)(b)(i) specified that promoter(s) seeking re-classification and persons related to the promoter(s) seeking re-classification shall not together hold more than 10% of the total voting rights in the listed entity. However, as stated by Mirza, the married daughters would hold more than 10% of the total voting rights of Mirza after the gift of shares by the Promoter. Therefore, based on regulation 31A(3)(b)(i) of LODR, the daughters of the Promoter are not eligible to seek re-classification from the promoter group to public.

This informal guidance is welcomed as guidance is provided to the market and promoters/promoter groups of listed entities who wish to undertake various transactions involving their family members.

Author:

Sushim Aryan, Associate

Footnote:

[1] Regulation 31A(6)of LODR – In case of transmission, succession, inheritance and gift of shares held by a promoter/ person belonging to the promoter group:
(a) immediately on such event, the recipient of such shares shall be classified as a promoter/ person belonging to the promoter group, as applicable.
(b) subsequently, in case the recipient classified as a promoter/person belonging to the promoter group proposes to seek re-classification of status as public, it may do so subject to compliance with conditions specified in sub-regulation (3) above.
(c) in case of death of a promoter/person belonging to the promoter group, such person shall automatically cease to be included as a promoter/person belonging to the promoter group.

Date: September 9, 2020