India Inc mulls way ahead after failing to meet Sebi's regulatory curbs
Adani and Videocon are among the 105 companies where promoters failed to meet the June 3 deadline for lowering stakes to 75%.
Adani Ports on Wednesday moved a board resolution to sell some of the shares owned by promoters to institutional investors while Videocon Industries told ET that it would offload 2 lakh shares within the next three months.
Adani and Videocon are among the 105 companies where promoters failed to meet the June 3 deadline for lowering stakes to 75%. Among other things, Sebi has barred these promoters from receiving dividend and exercising voting rights.
"Annual general meetings are on and a freeze on voting rights and corporate benefits will have immediate impact because promoters will not be able to take dividends on the frozen portion...It could adversely affect their cash flow," said JN Gupta, former executive director of Sebi and founder of proxy advisory firm SES.
In the past two years, Sebi has been nudging companies to raise public shareholding to at least 25%. A higher public float, the regulator believes, deepens the market and makes it tougher for dominant shareholders to manipulate stock price.
Adani Ports declined comment. According to a spokesman for Essar Ports, "The promoters (Essar Shipping and Logistics) of the company have successfully completed the offer for sale process for selling 22,806,018 equity shares of the company, aggregating to 5.33% of the paid-up share capital of the company. The company has written to Sebi apprising them of the same."
A spokesman for Essar Ports said the company had completed its OFS process and "also shared the status of the balance dilution by way of conversion of GDS held by Port of Antwerp International UK Limited".
The proposed conversion will raise public shareholding in the company to 25.03%. But it's unclear whether Sebi would allow companies to take such a route to meet the minimum public shareholding norm.
Securities lawyers said the Sebi order could impact regular activities of companies. "Pressure will be brought to bear on the promoters because a number of restrictions are placed. Dividends, rights, bonus, directorships, transacting in shares - all these are matters that will impact a number of normal activities that a company may want to do. It will be interesting to see whether this restriction will also apply to merger or restructuring approvals," said Vivek Gupta, partner, BMR Advisors.
He said some companies could challenge the order, arguing that basic rights under the Companies Act cannot be taken away.
While passing the order, the regulator has ensured that it does not hurt minority shareholders. In the calculation of the 'excess' holding, Sebi has come up with an interesting formula. The excess is not merely the holding above 75%, but is arrived at by proportionately calculating the promoter entitlement using the 75:25 ratio and applying this to the actual public holding. "Thus, a 95:5 (promoter:public) holding will not mean a 20% excess but an 80% excess. And all rights - voting, economic, etc - would remain frozen till compliance is ensured," Vivek said.
Sebi may even consider other penal actions such as imposing monetary penalty, initiating criminal proceeding, shifting a stock to the trade-to-trade segment and excluding a scrip from futures & options segment.
Some legal experts have questioned whether Sebi's single interim order can apply to all 105 companies. "The regulator has treated them all alike without necessarily going into the facts and circumstances of each company or the reasons behind the non-compliance. A post-facto opportunity to be heard has been provided to the companies who may file their replies and also avail the opportunity for a personal hearing before Sebi," said Akila Agrawal, partner at law firm Amarchand & Mangaldas & Suresh A Shroff Co.
Para 18 of the order is effectively a show cause notice to the said companies with reference to the final order that may be passed against the companies. "Companies will have to review the order with reference to their specific facts," said Agrawal.