25% Norm: SEBI vs Non-Compliant Promoters/Directors

UK Sinha, Chairman, SEBI in June 2012
That is not something that has come overnight; the timeframe given was 3 years.

UK Sinha, Chairman, SEBI in August 2012
Please show your intent, don't expect everything from SEBI. I am giving an assurance that we are willing but where is the action from your side UK Sinha, Chairman, SEBI in August 2012
I want to make it clear those who do not follow SEBI guidelines on min public shareholding, they will have to face consequences  Those consequences became clear this week when the 3-year time period to comply with the 25% minimum public shareholding norm came to an end. On June 4th SEBI passed an interim order including sanctions against promoters and directors of 105 companies that have not yet increased public shareholding to 25%. The non-compliant promoters & directors have 21 days to make their case and thereafter individual final orders will be issued based on the merits in each case. Will SEBI's bark be worse than its bite? Payaswini Upadhyay gets experts thinking aloud  Adani, Ports, Bombay Rayon Fashions, Omaxe, Tata Teleservices, Videocon Industries and 100 other companies have failed to comply with the 25% minimum public shareholding norm. Most names on the list are lesser known companies and 33 of them are in fact currently suspended from trading on the exchanges. Sanjay Asher
Partner, Crawford Bailey
"If you see some of the companies, actually majority of the companies, the liquidity in the market is not there. There is no trading volume, there is no trading that takes place in these securities and so it becomes extremely difficult for a promoter or for a company to follow the mechanism which is provided by SEBI in their circular. For eg, if I do an OFS, its possible investors might not be interested in my stock. And even if they do, it would be at substantial discount to the market price. I may not be able to comply with requirement of IPP program requirements. I may not want to do a Rights Issue- I may not need funds and then be answerable to shareholders that I have taken funds but I don't know where to deploy it." Companies, their promoters and directors may present these defenses to SEBI in response to the regulator's interim order. But till then, they are faced with multiple sanctions including  a. the freezing of voting rights and corporate benefits like dividend, rights, bonus shares, split, with respect to the excess of proportionate promoter shareholding  b. promoters and directors of non-compliant companies  have also been prohibited from buying, selling or dealing in their company securities except for the purpose of complying with the 25% norm  c. and they have also been restrained from taking up any new position as director in any listed company. Sandeep Parekh
Founder, Finsec Law Advisors
"I find the nature of the order – while it seems to be remedial in nature- ends up being punitive. I think there are two issues from a legal perspective- I think it is well established that remedial part which we called directions cannot be punitive in nature. And this seems to getting into punitive territory rather than correcting a wrong. And the other aspect is its bit of an overkill- these are not people who are manipulators, who are damaging the market per se. Sure they have missed a deadline, sure they are in violation but that hardly seems like something which requires same level of enforcement action as manipulation or insider trading." JN Gupta
Founder, SES
"It is more or less on my expected lines but one provision has lost a little bit of punch in this order because what they have done is they have frozen the proportionate right of the voting in dividend. Now as a result of which what is happening is that there is no impact on the control that they are exercising on the company. So that means there is no pressure, say for eg, today somebody has 90% shareholding and you are freezing 60% of shareholding and balance3 0% is not frozen. So when something comes for voting in AGM, 10% is with the public and 30% is with the promoter. So the promoter will still sail with the 75% majority. Now had they frozen the entire promoter shareholding or the right to the dividend, then they would have exerted a lot of pressure on the promoter to comply faster." Sanjay Asher
Partner, Crawford Bailey
"Companies Act provides a shareholder and a member voting rights. You can't just by passing an order under SEBI Act or under SCRA freeze any voting rights. There is no provision under SCRA or SEBI to freeze voting rights. It can levy restrain from capital markets but surely 11 (4), 11B and 12A does not permit that." Sandeep Parekh
Founder, Finsec Law Advisors
"It's a well established principle that if you have a manipulator, you can freeze his voting rights. So it's silly to say that this right is enshrined in Company Law. Company law doesn't allow you to play havoc with the market- that's a very extreme argument. SEBI has powers over voting, economic rights. By that metric, pretty much every action of SEBI would be contrary to Company Law. So I would not buy that at all." Sanjay Asher
Partner, Crawford Bailey
"SEBI has to make an inquiry before it passes an order for purpose of giving directions. Under 11 (4), 11B and 12A. If you see the order, it just says we have time and again informed the promoters and the company, we have facilitated for them to do it and now since they have not done it, we are giving them orders and passing directions. There has to be an inquiry as to why the promoters have not done it or is there a price manipulation on the shares or is it harmful to the small investor or market intermediaries- without any reasons, SEBI has gone ahead and said in my opinion enough chances have been given and therefore I am passing this order. If challenged in a court of law, surely it'll be set aside." But these are just interim measures. The affected entities do have 21 days to make their case to SEBI and thereafter final orders will be passed based on the merit of each case. The SEBI Chief said as much earlier this week. UK Sinha, Chairman, SEBI on 6th June, 2013
"It is very clear that this is an interim order and after the interim order, people have been asked to show cause. Going into the merits of the show-cause, individual decisions will be taken on a case-to-case basis." SEBI's order explains the need for depth, dispersion, liquidity and equitable participation for the orderly development of the securities market.  Maybe that explains why it has held promoters and directors, including independent directors, responsible for their companies' non-compliance with the 25% minimum public shareholding norm. Several well known Independent Directors on the boards of these 105 companies- including Amal Ganguli, Nadir Godrej, NS Ramachandran, Devi Dayal and other prominent names will now have to defend themselves. Sandeep Parekh
Founder, Finsec Law Advisors
"The show cause notice will go to all Directors and then I would guess that each Independent Director would come forth and say- look I am not really involved in the non-compliance and I have been pushing them they can give their individual defense." JN Gupta
Founder, SES
"If any Director says that I'm not responsible for what has happened, then the Director needs to be told that the Board is not an individual but a body with collective responsibility. If I am ID on a board and my board is not listening to me then why should I be a part of that Board? You cant say that till the system is hunky dory I am on the right side; I am part of the board for any wrong thing that happens, I would say that I was not listened to...if u were not listened to you must have resigned and it is a collective responsibility can't distinguish which part of the board was responsible and which part was not responsible." Sanjay Asher
Partner, Crawford Bailey
"Are you saying if I don't comply with Factories Act, Independent Directors should be penalized? I don't comply with Companies Act, Independent Directors should be penalized? Or if I don't comply with Payment of Bonus Act, Independent Directors should be penalized? Or any other economic statute or fiscal statute or employment law statue. So I don't know where SEBI has got this jurisdiction to penalize Independent Directors." These sanctions apply at this interim stage. But SEBI has also warned that it may take further action against non-compliant companies, their promoters and directors
- By levying monetary penalties
- Initiating criminal proceedings
- Moving the scrip to trade-to-trade segment
- Excluding the scrip from F&O segment
- And any other action deemed appropriate Sandeep Parekh
Founder, Finsec Law Advisors
"Criminal prosecution- I think is highly unlikely because SEBI doesn't criminal prosecution even against very seasoned manipulators. So its very rare that SEBI will initiate a criminal prosecution for something which is more of a technical violation. I don't envisage criminal prosecution at all." Well, we'll know in a couple of weeks won't we? But the bigger test will come in August - the deadline for public sector companies, to meet the 10% minimum public shareholding norm. As yet some 11 PSUs have to comply. If they don't will SEBI succeed in freezing government voting rights… among other things? Sandeep Parekh
Founder, Finsec Law Advisors
"It's going to be fairly humorous- the outcome is going to be fairly humorous. Is SEBI going o threaten the President of India with prosecution because he is the one who is holding the shares on behalf of the government of India. I hope SEBI applies the same standards as it has to the private sector." JN Gupta
Founder, SES
"I think it would be very interesting thing to observe but I feel as the precedent by this order, SEBI would have no option but to issue a similar order to PSU's otherwise none of the case that will be filed against this order will stand the scrutiny of law if SEBI has to do discretionary thing with the PSU's." Sandeep Parekh
Founder, Finsec Law Advisors
"I have no idea how's its going to play out. A similar episode happened 5-7 years back when you had requirement of having majority Independent Directors on Boards and public sector guys are most flagrant violators of Clause 49 and SEBI, in fact, has not been very harsh on those companies. Many of those companies, even after 5 years continue to be in violation. So I hope the same trend doesn't continue."