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Securities Exchange Board of India (SEBI): Madhabi Puri Buch (Whole Time Member), prima facie found two Infosys employees and 6 others violating the SEBI (Prohibition of Insider Trading) Regulations, 2015 [insider trading regulations] and hence all have been restrained from buying, selling or dealing in securities pending detailed examination and until further orders.

Background

 SEBI alert system-generated insider trading alerts for the scrip of Infosys Limited for the period of July 15, 2020.

Based on the SEBI alerts, a preliminary examination was conducted to ascertain whether certain persons/entities traded in the scrip of INFY while they were in possession of/ on the basis of unpublished price sensitive information in contravention of provisions of SEBI Act read with SEBI (Prohibition of Insider Trading) Regulations, 2015 [PIT Regulations]?

INFY Scrip is in Future and Option Segment and a part of SENSEX and NIFTY.

As per the SEBI Examination, it was found that Noticee 1 to 5 had prima facie violated the provisions of SEBI Act and PIT Regulations.

Venkata/Noticee 8, Senior Principal, Corporate Accounting Group of INFY, had been identified as a Designated Person by INFY for the purpose of UPSI and by virtue of that he was reasonably expected to have access to and be in possession of the UPSI. Thus, Venkata is an insider. Pranshu who was connected with Venkata is also an insider.

Venkata had communicated the UPSI to Pranshu and Pranshu had procured UPSI from Venkata and thereby Venkata and Pranshu had prime facie violated the provision of SEBI Act and PIT Regulations.

 Analysis & Finding

Issue No. 1: Whether information relating to the financial results of INFY including basic financial parameters of profit & loss (P&L) and balance sheet (BS) as well as key financial and operational parameters which contribute to various elements of the P&L and BS for the quarter ending June 30, 2020 was UPSI. If so, what was the UPSI Period?

Issue No. 2: Whether Pranshu, Amit and Bharath are insiders in terms of PIT Regulations, 2015?

Issue No. 3: Whether Amit and Bharath, while in possession of and on the basis of UPSI, had traded in the scrip of INFY on behalf of Capital One?

Issue No. 4: Whether Amit, while in possession of and on the basis of UPSI, had traded in the scrip of INFY on behalf of Tesora?

Issue No. 5: Based on the answers to issue Nos. 1 to 4, whether there are the relevant provisions of SEBI Act and PIT Regulations that have been violated by Noticee No. 1 to 5 and who all are prima facie liable for the same?

Issue No. 6: Whether Venkata is an insider and whether there is prima facie evidence that he had also communicated the UPSI to Pranshu? If yes, then what are the relevant provisions of SEBI Act and PIT Regulations that have been violated by them?

Issue No. 7: On the determination of the above issues, whether urgent directions, if any, should be issued in the present matter?

Understanding Price Sensitive Information & its implication

Positive UPSI:

If an insider was in possession of positive UPSI about a Company, and traded while in possession of such UPSI, he would be expected to buy the shares of the Company before such information became public. Once the information became public, since it was positive in nature, it would be expected that the share price of the company would go up and the insider would then sell the shares at such higher price, thereby making a profit using the UPSI.

It may be noted though, that the policy of the PIT Regulation is to prevent dealing in securities, while in possession of UPSI irrespective of whether the UPSI is positive or negative and irrespective of whether profit is made or not.

Negative UPSI:

If the UPSI happened to be negative, then the insider would be expected to sell the shares of the Company at a particular price before the UPSI became public (including short selling if he did not already hold the shares).

What is Delta?

A metric called the “Delta” of the positions is such a metric that is used by the market and the traders to monitor their overall net position across all their trades/positions.

This metric nets out all the camouflage and all the complexity, and gives a simple measure of how much approximate profit the insider stands to make if his directional view based on the UPSI turns out to be rights and equally, how much loss stands to make if his directional view turns out to be wrong.

Issue Wise findings

Issue No. 1:

Regulation 2(1)(n) of PIT Regulations defines “unpublished price sensitive information”.

Regulation 2(1)(n) of PIT Regulations:

 

“unpublished price sensitive information” means any information relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: –

  1. financial results; ……

 Bench found that the information relating to the financial results of INFY which contributed to the various elements of the P&L and B&S for the quarter ended on June 30, 2020 was Price Sensitive Information and on account of the same being unpublished until July 25, 2020 it was Unpublished Price Sensitive Information (UPSI).

Pursuant to UPSI being available publicly on July 15, 2020 there was a sudden rise in price of INFY scrip that could not be attributed to a general risk in the market.

Based on Structured Digital Database (SDD) it was prima facie found that the UPSI had come into existence on June 29, 2020.

SEBI found no material on record to discredit the assertion of the Company about timing of existence of UPSI.

In Board’s opinion, UPSI was made public on July 15, 2020, hence the UPSI Period will be from June 29, 2020 to July 15, 2020.

Issue No. 2:

It was noted that frequent telephonic communication happened between Amit and Pranshu on 7 occasions and out of which the largest duration call was made on July 9, 2020.

On noting various factors, SEBI prima facie was of the view that:

(a) Pranshu is a connected person on account of being an officer/employee of INFY (Senior Corporate Counsel) that allows him, directly or indirectly, access to the UPSI / he is reasonably expected to have access to the UPSI and on the preponderance of probability basis he is in possession of the UPSI

(b) Pranshu has communicated the UPSI to Amit in some form and manner and Amit has procured the UPSI from Pranshu in some form and manner; and

(c) Amit has communicated the UPSI to Bharath and Bharath has procured the UPSI from Amit in some form and manner.

SEBI’s finding on this issue:

  • Pranshu,being an officer/employeeofINFY(SeniorCorporateCounselofINFY),is a connected person under Regulation 2(1)(d) of PIT Regulations and is reasonably expected to have access to the UPSI and on preponderance of probability basis he is in possession of the UPSI. Therefore, Pranshu is an insider as per Regulation 2(1)(g)(i) & (ii) of PIT Regulations.
  • Amit has been connected with Pranshu, (an employee of INFY) (a) through frequent telephonic communication; (b) Pranshu had fund transaction with Mahrishi and Mahrishi had fund transaction with Shyama Devi Bhutra (Mother of Amit) and (c) Ram Bilas Bhutra (Father of Pranshu) and Amit are directors in Mahrishi. Thus, Amit is a connected person under Regulation 2(1)(d) of PIT Regulations and is reasonably expected to have access to the USPI and on preponderance of probability basis he is in possession of the UPSI. Hence, Amit had procured UPSI from Pranshu and was in possession of the UPSI. Therefore, Amit is an insider as per Regulation 2(1)(g)(i) of PIT Regulations.
  • Bharath and Amit are both working partners of Capital One Partners. Bharath, being in constant touch with Amit through (a) professional relationship and (b) telephonic communication. Thus, by virtue of that relationship it gives Bharath, directly or indirectly, access to unpublished price sensitive information through Amit. Hence, Bharath had procured the UPSI from Amit and on preponderance of probability basis he is in possession of the UPSI. Therefore, Bharath is an insider as per Regulation 2(1)(g)(ii) of PIT Regulations.

Issue No. 3:

Yes, Prima Facie it was observed that both Amit and Bharath being insiders, while in possession of the UPSI, during the UPSI period, had  placed orders/trading instruction on behalf of Capital One for trading the securities of INFY.

Prima Facie, it was also found that trades of Capital Once in the securities of INFY were not only executed while in possession of the but also on the basis of the UPSI.

Issue No. 4:

Amit, Manish and Ankush are working partners of Tesora having 35%, 35% and 30% share respectively in profit or loss arising out of business income.

Board prima facie opined that Amit was an insider and had access to and possession of the UPSI. Amit being an insider, while in possession of the USPI, during the UPSI period, had placed orders / trading instructions on behalf of Tesora for trading in the securities of INFY.

Trades of Tesora in the securities of INFY were not only executed while in possession of the UPSI but also on the basis of the UPSI.

Issue No. 5

Pranshu a prima facie insider, on July 02, 2020  and on July 09, 2020 (i.e. one day prior to the start of trading by Capital One) had spoken to Amit (working partner of Capital One).

Coupled with Pranshu’s connection with Amit through Mahrishi and the fact that on July 10, 2020 Capital One started building significant position in the scrip of INFY, prima facie, it lead to the conclusion, on preponderance of probability basis, that Pranshu, who was prima facie had access to and in possession of the UPSI, had communicated the UPSI to Amit in some form or manner. Hence, Pranhsu Bhutra has prima facie violated the provision of Section 12A (e) of SEBI Act, 1992 and Regulations 3(1) of PIT Regulations.

Amit prima facie had procured the UPSI from Pranshu and communicated the same to Bharath. He traded on behalf of Capital Once and Tesora prima facie while in possession of an on the basis of the UPSI. Hence, Amit Bhutra violated the provisions of Section 12A (d) & (e) of SEBI Act, 1992 and Regulations 3(1), 3(2) & 4(1) of PIT Regulations.

Even Bharath C Jain prima facie violated the provision of Section 12A (d) & € of SEBI Act, 1992 and Regulations 3(2) & 4(1) of PIT Regulations.

Amit and Bharath were both working partners of Capital One and both had, prima facie, while in possession of and on the basis of the UPSI, placed orders / given trading instructions on behalf of Capital One.

From July 10, 2020, Capital One had started building a significant position / delta in the scrip of INFY. Due to the said trading, Capital One had generated proceeds of Rs. 2,79,51,432/-.

Hence, Capital One prima facie violated the provision of Section 12A (d) & (e) of SEBI Act, 1992 and Regulations 4(1) of PIT Regulations.

A partner of Capital One who indulges in such conduct / omission, is also liable under securities laws, if his act/omission is in violation of any provision under securities law.

Board noted that,

As per Section 27 of SEBI Act, for a contravention of law committed by the firm, apart from the firm, the partners of firm, who, at the time of contravention was committed

(a) were in charge of, and responsible to the firm for the conduct of the business of the firm; or

(b) were having knowledge of the said contravention of law; or

(c) had failed to exercised due diligence to prevent the said contravention of law; or

(d) had contributed to the contravention of law through their consent or connivance of or neglect, are also liable for said contravention of law committed by the firm and punished accordingly.

Prima Facie in respect of trading carried out in the name of Capital One in the scrip of INFY was a violation of securities laws and the partners Amit Bhutra and Bharath C Jain were in charge of the affairs. Hence as per Section 27 of SEBI Act both of them were severally and jointly liable with Capital One for the violations of provisions of SEBI Act and PIT Regulations committed by Capital One and consequently for impounding of proceeds generated through prima facie  insider trading.

Tesora Capital

Amit was the working partner of Tesora and prima facie while in possession of and on the basis of the UPSI had placed orders/given trading instructions on behalf of Tesora. Hence, prima facie Tesora had violated the provisions of Section 12A (d) & (e) of SEBI Act, 1992 and Regulations 4(1) of PIT Regulations.

Section 25 of IPA deals with situations where the act of the firm has caused loss / injury to a third party.

The liability of acting partners and non-acting partners (collectively known as firm) for the injury to the third party is an outcome of joint and several liability of such partners under IPA, irrespective of whether that the conduct (act of omission or commission of the firm) which gave rise to the loss/injury to the third party is also in violation of any provision under securities law.

In view of Section 27 of SEBI Act, Mr. Amit Bhutra is, prima facie, liable, jointly and severally with Tesora for proceeds of Rs 26,81,916/- generated by Tesora through prima facie insider trading activity.

As per Section 25 of IPA read with Section 2(a) of IPA, Mr Manish C Jain and Mr.Ankush Bhutra were, prima facie, liable, jointly and severally with Tesora and Mr Amit Bhutra for proceeds of Rs 26,81,916 /- generated by Tesora through prima facie insider trading activity.

Issue 6:

Prima facie Venkata was a connected person under Regulation 2(1)(d) of PIT Regulations and also a Designated Person for the UPSI, and thus had access to and possession of the UPSI, hence prima facie  was also an insider as per Regulation 2(1)(g)(i) of PIT Regulations.

Further, long duration call between Venkata and Pranshu on July 02, 2020 (i.e. few days after the UPSI came into existence) and on July 09, 2020 (i.e. one day prior to the start of trading by Capital One), prima facie lead to the conclusion on preponderance of probability basis, that Venkata, who was in possession of the UPSI, had prima facie communicated the UPSI to Pranshu in some form or manner.

Therefore, Venkata Subramaniam V. V. prima facie violated the provision of Section 12A(e) of SEBI Act, 1992 and Regulation 3(1) of PIT Regulations.

Pranshu, who was prima facie in frequent communication with Venkata through phone calls during the UPSI period, prima facie was a connected person under Regulation 2(1)(d) of PIT Regulations. Pranshu had a long duration call with Venkata on July 02, 2020 (i.e. few days after the UPSI came into existence) and on July 09, 2020 (i.e. one day prior to the start of trading by Capital One). This prima facie leads to the conclusion, on preponderance of probability basis that Pranshu had prima facie procured UPSI from Venkata.

Therefore, Pranshu was once again found to be an insider under Regulation 2(1)(g)(ii) of PIT Regulations and Pranhsu Bhutra prima facie violated the provision of Section 12A (e) of SEBI Act, 1992 and Regulations 3(2) of PIT Regulations.

Issue 7:

Coram held that since the conduct of the aforementioned entities, do not, prima facie, appear to be in the interest of investors and the securities market, necessary action has to be taken against them immediately, else it may lead to loss of investors’ trust in the securities market.

Board observed that considering the facts and circumstances of this case and violations as prima facie found in this case and prima facie repetitive trading pattern in the scrip of INFY by Capital One and Tesora during the period close to the announcement of financial results for the quarters ended December 31st 2019, March 31st 2020, June 30th 2020 and September 30th 2020, this is a fit case where, pending detailed examination, effective and expeditious preventive and remedial action is required to be taken by way of ad interim ex – parte order to protect the interests of investors and preserve the safety and integrity of the securities market.

Order

SEBI issued the following directions:

71.1.  Mr. Pranshu Bhutra, Mr. Amit Bhutra, Mr. Bharath C Jain, Capital One Partner, Tesora Capital and Mr. Venkata Subramaniam V. V are restrained from buying, selling or dealing in securities, either directly or indirectly, in any manner whatsoever until further orders;

71.2.  Mr. Manish C Jain and Mr. Ankush Bhutra are restrained from buying, selling or dealing in securities, either directly or indirectly, in any manner whatsoever until the compliance of direction mentioned at paragraph 71.5 below;

71.3.  If Mr. Pranshu Bhutra, Mr. Amit Bhutra, Mr. Bharath C Jain, Capital One Partner, Tesora Capital,Mr. Venkata Subramaniam V. V,Mr. Manish C Jain and Mr. Ankush Bhutra have any open position in any exchange traded derivative contracts, as on the date of the order, they can close out / square off such open positions within 3 months from the date of order or at the expiry of such contracts, whichever is earlier. The said entities are permitted to settle the pay-in and pay-out obligations in respect of transactions, if any, which have taken place before the close of trading on the date of this order;

71.4.  The bank accounts of Capital One Partners, Mr. Amit Bhutra and Mr.Bharath C Jain to the extent of amount mentioned above is impounded. Further, Capital One Partners, Mr. Amit Bhutra and Mr. Bharath C Jain are directed to open an escrow account with a nationalized bank, jointly and severally and deposit the impounded amount mentioned therein which has been prima facie found to be proceeds generated from the prima facie insider trading, in this Order, within 15 days from the date of service of this order. The escrow account/s shall be an interest-bearing escrow account and shall create a lien in favour of SEBI. Further, the monies kept therein shall not be released without permission from SEBI;

71.5.  The bank accounts of Tesora Capital, Mr. Amit Bhutra, Mr. Manish C Jain and Mr. Ankush Bhutra to the extent of amount mentioned in table no. 13 at paragraph 58 above is impounded. Further, Tesora Capital, Mr. Amit Bhutra, Mr. Manish C Jain and Mr. Ankush Bhutra are directed to open an escrow account with a nationalized bank, jointly and severally and deposit the impounded amount mentioned therein which has been prima facie found to be proceeds generated from the prima facie insider trading, in this Order, within 15 days from the date of service of this order. The escrow account/s shall be an interest bearing escrow account and shall create a lien in favour of SEBI. Further, the monies kept therein shall not be released without permission from SEBI;

71.6.  Mr. Amit Bhutra, Mr. Bharath C Jain, Capital One Partner, Tesora Capital, Mr. Manish C Jain and Mr. Ankush Bhutra are directed not to dispose of or alienate any assets, whether movable or immovable, or any interest or investment or charge on any of such assets held in their name, jointly or severally, including money lying in bank accounts except with the prior permission of SEBI until the impounded amount is deposited in the escrow account..

71.7.  Mr. Amit Bhutra, Mr. Bharath C Jain, Capital One Partner, Tesora Capital, Mr. Manish C Jain and Mr. Ankush Bhutra are directed to provide a full inventory of all assets held in their name, jointly or severally, whether movable or immovable, or any interest or investment or charge on any of such assets, including details of all bank accounts, Demat accounts and mutual fund investments, immediately but not later than 5 working days from the date of receipt of this order;

71.8.  The banks where Capital One Partners, Tesora Capital, Mr. Amit Bhutra, Mr. Bharath C Jain, Mr. Manish C Jain and Mr. Ankush Bhutra are holding bank accounts, jointly or severally, are directed to ensure that till further directions, except for compliance of direction at paragraph 71.4 & 71.5, no debits are made in the said bank accounts without the permission of SEBI. The banks are directed to ensure that all the above directions are strictly enforced. On production of proof of deposit of entire amount mentioned in column 4 of table no. 13 in respect of serial No.1 entities by any of the entities mentioned in column 2 corresponding to serial No.1 of table no. 13, in the escrow account, SEBI shall communicate to the banks to defreeze the accounts corresponding to all the entities mentioned in the column No. 2 of table no. 13 corresponding to serial No.1. Similarly on production of proof of deposit of entire amount mentioned in column 4 of table no. 13 in respect of serial No.2 entities by any of the entities mentioned in column 2 corresponding to serial No.2 of table no. 13, in the escrow account, SEBI shall communicate to the banks to defreeze the accounts corresponding to all the entities mentioned in the column No. 2 of table no. 13 correspondings to serial No.2. However, in case of entities who are falling in both serial no.1 and 2 and full deposit of amount mentioned in column no.4 of serial no.1 and 2 has not been made, such persons bank account shall remain frozen till the entire amount mentioned in column no.4 of serial no.1 and 2 are deposited.

71.9. The Depositories are directed to ensure, that till further directions, no credits are made in the demat accounts of the Noticee No. 1 to 8, held individually or jointly. The depositories are further directed to ensure that till further direction except for compliance of direction mentioned at paragraphs 71.3, 71.4 and 71.5, no debits are made in the demat accounts of the said Noticees, held individually or jointly.

71.10.The Registrar and Transfer Agents are also directed to ensure that till further directions, no credits are permitted and that except for compliance of direction at paragraph 71.4 and 71.5 the securities / mutual funds units held in the name of the Noticee No. 1 to 8, jointly or severally, are not transferred/redeemed.

[Insider Trading in Shares of Infosys Ltd.,  In Re., 2021 SCC OnLine Sebi 126, decided on 31-05-2021]

Op EdsOP. ED.

While presenting her maiden budget last year, India’s Finance Minister Nirmala Sitharaman indicated that the Government would be considering raising the Minimum Public Shareholding (“MPS”) norms from the current minimum limit of 25% in all listed entities to a new baseline of 35%[1]. This would mean that a minimum of 35% of shares of any listed entity would now have to be held by the public shareholders.

According to various market sources, this increase in minimum public shareholding norms is likely to affect 1174 of the 4700 companies[2] listed in the Indian stock market and the total quantum of sale that would be required to be made by these companies would be around Rs. 3,87,000 Crores[3]. TCS (~Rs. 59,600 Crores), Wipro (~Rs. 15,000 Crores) and D-Mart (~Rs. 14,000 Crores) would have to make some of the biggest sales[4] and the stocks of such companies would be expected to underperform as there might not always be sufficient demand to ensure price stability[5]

The dilution of promoter holding in some of the biggest listed entities in the Indian market would lead to better price discovery, as the shares would now be held by multiple entities instead of a few promoters and connected entities. Further, the increase in liquidity would also help in adding depth to the market. However, certain companies, especially multinational corporations may choose to delist as now the promoters and promoter group entities would not be able to unilaterally pass special resolutions (which required 2/3rd majority), which would take away effective control from them on certain issues. This increase in equity in the market would also have an effect on SENSEX and NIFTY, which are calculated by the free float method[6]. The sale of equity would result in earnings of Rs 3,87,000 crores by the promoters which in turn would augur a windfall on the government’s coffers in the form of capital gains tax. However, whether the Indian markets are in a state to absorb such additional equity given the current market conditions remains in question. Fortunately, no change has been made to the thresholds yet and as per news reports, even SEBI is looking to differ the introduction of the new norms[7].

In light of the COVID-19 pandemic that has brought  the entire economy to screeching halt, SEBI has granted some necessary exemptions and one of them is delaying of filing the shareholding by the promoters from April 15th to June 1st, 2020[8]. However, SEBI has not relaxed the minimum public shareholding norms and rightly so. Given how low the current market is, relaxing these norms would only allow the promoters to buy company stocks at a cheaper rate and then resell this stock the public once they are required to comply with the shareholding norms again. Not only this, but it is in this time of chaos that the corporate governance standards in any company need to be applied stringently and allowing promoters to acquire further shareholding might become a hindrance to this. Further, such exemptions might put at least moral obligations on companies to give their public shareholders an exit, which would add to the duress they currently face. Hence, the status quo maintained by SEBI on the shareholding issue on either side has helped maintain the stability in times of the pandemic.

As public shareholding is the opposite of promoter shareholding, it is essential to understand who a promoter is. According to the SEBI Regulations, a promoter is essentially someone who is in control of the company[9]. However, along with the concept of “promoter”, SEBI has also introduced the concept of “promoter group”[10] which artificially imports certain categories of people such as the immediate relatives and virtually bounds them in the concept of controlling group, which is otherwise a rather fluid concept in most foreign jurisdictions.

If we look at the nature of this relationship through the lens of various SEBI Regulations that seek to regulate the conduct of the promoters of a company, this inclusion into the promoter shareholder category imposes immense burden and liability on the promoter group entity without giving them many rights. Along with this, this classification of entities in the “promoter group” category is based on direct or actual control that is being exercised by such entities on the actions of the company but on the likelihood of the person applying control over the company, and hence, this label of promoter group in not a desirable one, especially for those that are not actually in control of the company.

The problems, however, do not stop here. Once someone is classified as a promoter, getting reclassified is a long drawn and painful process where not only the person who wants to get reclassified but also the persons related to him have to reduce their shareholding to less than 10%[11] and have to get the approval of minority shareholders[12]. Thus, it is essential that SEBI, before coming out with the requirement to actually increase the public float rule to 35% should reconsider the concept of “promoter” and more importantly “promoter group” in order to give a more equitable treatment to this category.

A suitable alternative to this concept of promoter and promoter group is the concept of “Controlling Shareholder”. According to the Financial Conduct Authority (“FCA”), which is the regulatory authority for the United Kingdom, a controlling shareholder is a person who, on his own or with someone he is acting in concert with, is able to cast more than 30% of the voting rights or is able to substantially control all the matters in the general meeting of a company[13]. Further, according to the Singapore Exchange, a “controlling shareholder” is someone who holds directly or indirectly holds more than 15% shares of a company or is in fact in control of a company[14].  In China, there is a concept of “Actual Controlling Person” according to which, any natural person, government authority, enterprise or international organisation that may exercise ultimate control, either directly or indirectly through equity interests, trusts, contracts or any other means should be considered as a the “actual controlling person”. Further, it provides that control might be asserted in the following three ways:

  1. by holding more than 50% equity interests, shares, voting rights, property, either held individually or along with related parties; or
  2. by holding less than 50% equity interests, shares, voting rights, property, but holding adequate voting power to materially influence the decision making of a company; or
  3. by holding material influence over the company’s finances, technology or human resources etc.[15]

China also has a concept of “Actual Controlling Party” which is someone who is not a shareholder of a company but exercises control over a company through an agreement, an investment relationship or through other relationships[16].

Thus, observing these three definitions of controlling shareholder, it can be seen that the controlling shareholder regime is similar to the promoter regime. However, the key point of differentia between the two regimes is who does it encompass within the scope of its definition, and thus, the principle of actual versus implied control. While in the promoter, and more importantly promoter group regime, the principle was not that of actual application of control over the company by the related parties but rather the likelihood of them applying this control through the promoter they are related to.

Now, what this does in essence is that it obligates these related parties to periodically and repeatedly disclose their shareholding and transactions for the off chance that they might be colluding with the promoter they are related to, in order to assert control over the functioning of the company. However, in the controlling shareholder regime, the focus is on the shareholder that holds the requisite shares or voting rights in order to actually assert control over the functioning of the company. Further, if we observe the regulatory regime in China, even there, the principle is that of liability to the person who holds control. All of these regimes are in congruence with the principle of applying liability to the person who is actually in a position to or has the power to assert control over a company.

Thus, in terms of parity between the two kinds of shareholders, the entities belonging to the “Promoter Group” class are at a disadvantage just because of their personal or business relations with the promoter or the company, without any actual proof of them asserting any control over the company and hence, the controlling shareholder regime gives a better footing all of the stakeholders of the company.

Along with this reconsideration of the concept of promoters and promoter groups, SEBI also needs to revamp its reclassification norms in order to make it easier for people to classified or declassified as promoters based on the amount of control that could be exercised by them. If the principle of being a promoter is based on shareholding and control, then it is only logical that when a person ceases to hold such shareholding or control that such person is declassified from the promoter status. The requirement for an approval by the minority shareholders only adds to the procedural red tape, especially when the person had ceased to hold the shareholding or the power to actually control the actions of a company.

To sum up, while it may be a commendable initiative of the Government of India to raise the minimum public shareholding norms, there are certain policy considerations that need to be taken into account before such a change is implemented. Given the huge costs associated with this move, and the resultant instability in the market of this move, it is essential that government takes into consideration issues such as the status of the promoter as well as the regulatory red tape associated with reclassification of the status of promoters in order to bring parity between the two classes of shareholders that form the market.

*****************


* Managing Partner, Corp Comm Legal

**5th Yr, B.A. LL.B.(Hons.) MNLU, Mumbai and student researcher.

[1] (2019, July 05), Budget 2019-20: Minimum public holding raised for listed firms. The Hindu, retrieved from https://www.thehindu.com/business/budget/budget-2019-20-minimum-public-holding-raised-for-listed-firms/article28298797.ece

[2] Bhuva, R. (2019, July 05), Market Gives a Thumbs Down to Budget. Fortune India, retrieved from https://www.fortuneindia.com/investing/markets-give-a-thumbs-down-to-budget-2019-20/103387

[3] Sharma, A. (2019, July 05), Minimum Public Shareholding at 35%; Here’s How it Will Impact Stock Market Liquidity. Business Today, retrieved from https://www.businesstoday.in/union-budget-2019/minimum-public-shareholding-at-35pc-here-how-it-will-impact-stock-market-liquidity/story/361960.html

[4] (2019, July 05), Stocks that will be hit by Budget move to raise public float to 35%. Economic Times, retrieved from https://economictimes.indiatimes.com/markets/stocks/news/stocks-that-will-be-hit-by-budget-move-to-raise-public-float-to-35/articleshow/70089518.cms.

[5] Mascerenhas, R. (2019, July 09). High promoter holding companies likely to underperform. Economic Times, retrieved from https://economictimes.indiatimes.com/markets/stocks/news/high-promoter-holding-companies-likely-to-underperform/articleshow/70136316.cms

[6] (2017, Dec. 01), What is Sensex and Nifty? How are they calculated? IIFL, retrieved from https://www.indiainfoline.com/article/news-top-story/what-is-sensex-and-nifty-how-are-they-calculated-indiainfoline-117120100511_1.html

[7] (2019, Sept. 12), SEBI may defer raising of minimum public shareholding to 35%, Business Standard, retrieved from https://www.business-standard.com/article/markets/sebi-may-defer-proposal-of-raising-minimum-public-shareholding-to-35-119091201678_1.html

[8] (2020, Mar. 27), Relaxation from compliance with certain provisions of the SAST Regulations, 2011 due to the COVID-19 pandemic, SEBI, retrieved from https://www.sebi.gov.in/legal/circulars/mar-2020/relaxation-from-compliance-with-certain-provisions-of-the-sast-regulations-2011-due-to-the-covid-19-pandemic_46442.html

[9] Reg. 2(1)(oo) of SEBI (Issuance of Capital and Disclosure Requirements) Regulations, 2018 

[10].Reg. 2(1)(pp) of SEBI (Issuance of Capital and Disclosure Requirements) Regulations, 2018

[11] Reg. 31-A(3)(b)(i) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

[12].Reg. 31-A(3)(a)(ii) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

[13] (2014, March 28) “Controlling Shareholder”, Financial Conduct Authority Handbook, retrieved from https://www.handbook.fca.org.uk/handbook/glossary/G3382.html

[14] Definition and Interpretation, Singapore Exchange Rulebook, Singapore Exchange, http://rulebook.sgx.com/en/display/display_plain.html?rbid=3271&element_id=4831&record_id=6460&print=1

[15] Appendix 1 to the 2016 Measures, the Filing Form for Establishment of Foreign Invested Enterprises issued by the Ministry of Commerce, People’s Republic of China. 

[16] Article 216 of the PRC Company Law, issued and latest amended by the Standing Committee of the National People’s Congress on December 28, 2013 and came into effect on March 1, 2014.