QUERY REGARDING PROMOTER
lokesh sharma
Rakesh Sharma
PROMOTER
As per Section 92 of the Companies Act, 2013 (“Act”) :- It is required for all companies including private companies to list out details in the prescribed format containing particulars as they stood on the close of the financial year regarding inter alia, promoters, directors, key managerial persons along with changes therein since the close of previous financial year. Promoter in simple terms is a person who has promoted the company, but the annual report seems to be misleading us to identify a promoter as a person who is the largest or dominant shareholder and not the person who conceived the idea and the Company. Take the instance of a large IT Company where all the founders and promoters have quit as directors, these persons were named in the prospectus as promoters, whereas in the annual return that is required to be filed for the year March 31, 2015 the name of the promoter may be the largest shareholder of the company that may be a Foreign Financial Institution (FII).
Let us analyse this issue of this identity crisis for a promoter.
Identifying a promoter
Identifying a promoter who is or may not be a promoter will be an issue before filing the Annual Return for the year 2015. The regulator seems to have suddenly woken up to lot of scams and wants to fix this issue of identifying the promoter.
The Small & Medium Enterprise Company (Laalla Company) may not have a problem as the promoter is the person who has incorporated the company, with only bank borrowings to fall back, this entity will not have an identity crisis for a promoter.
The Multi National Company (Bholla Company) has one large shareholder and another small shareholder, as there are no other shareholder, this entity will also not have an identity crisis for a promoter.
The Family Owned Company (Saalla Company), which have many shareholders and in some companies that is funded by angels’, venture capitalist or a private equity, this entity may actually run into an identity crisis. The issue can be on account of too many shareholders to choose from, to identify a promoter.
The Listed entity is the one that can have a huge problem in identifying and naming a Promoter as it will have to apply the entire test laid down in section 2(69) read with 2(27) of the Act.
The onus is on the professional to identify the identity of a promoter and to compile and complete the data on promoters before filing the Annual return.
POSITION OF A PROMOTER IN ESTABLISHING A COMPANY
When an individual has an idea for a new business venture, he or she may set about interesting others in the venture and persuade them to contribute capital to a company to be incorporate for the purpose of carrying on the venture. The individual will then be described as ‘promoter’ of the company. A person who acts in a professional capacity is not a promoter. A company is born only when it is duly incorporated. For incorporating a company various documents are to be prepared and other formalities are to be complied with. All this work is done by promoters.
Then the question arises that who really are promoters of a company, the most important work of a promoter is in the formation of a company. The whole process of the formation of a company may be divided into four stages (i) Promotion, (ii) Registration, (iii) Floatation and (iv) Commencement of business. Promotion is a term of wide import denoting the preliminary steps taken for the purpose of registration and floatation of the company. A promoter may be an individual, syndicate, association, partner or company.
The expression ‘promoter’ has been defined under Section 2(69) in the Companies Act, 2013 as:
“promoter” means a person—
a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or
b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;
The term is used expressly in sections 35, 39, 300 and 317.
In the case of Bosher v. Richmond Land Co., the term Promoter has been defined as:
“A Promoter is a person who brings about the incorporation and organization of a corporation. He brings together the persons who become interested in the enterprise, aids in procuring subscription, and sets in motion the machinery which leads to the formation itself.”
“A promoter is one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose.”
L.J. Brown in the case of Whaley Bridge printing Co. observed that the term promoter is “a term not of law but of business”.
To be a promoter one need not necessarily be associated with the initial formation of the company; one who subsequently helps to arrange floating of its capital will equally be regarded as a promoter. However, a person assisting the promoters by acting in a professional capacity do not thereby became promoters themselves. The relationship between a promoter and the company that he has floated must be deemed to be fiduciary relationship from the day the work of floating the company starts and continues up to the time that the directors take into their hands what remains to be done in the way of forming the company.
The status of the promoter is generally terminated when the Board of Directors has been formed and they start governing the company. Chronologically, the first persons who control or influence the company’s affairs are its promoters. It is they who conceive the idea of forming the company, and it is they who take the necessary steps to incorporate it, to provide it with share and loan capital etc. when these things have been done, they handover the control of the company to its directors, who are often themselves under a different name. on handling over the control of the company the promoter’s fiduciary and common law duties cease, and he is thereafter subject to no more extensive duties in dealing with the company than a third person who is unconnected with it.
Promoter
Meaning of Promoter
A promoter is a generic term associated with the person who starts a business. In common parlance, this person is also referred to as the founder of the business. A promoter typically is responsible for raising capital, targetting initial leads and chasing initial business opportunities, entering into the initial contracts for the business formation and incorporating the company.
The Substantial Acquisition of Shares Takeovers (SEBI) Regulation states that the promoter is:
(a) any person who is in control of the target company
(b) any person named as promoter in any offer document of the target company or any shareholding pattern filed by the target company with the stock exchanges pursuant to the listing agreement, whichever is later;
In the old Companies Act, 1956 there was no static definition of promoter although it was mentioned in various section, but in the new Companies Act, 2013 Section 2(69) defines promoter.
Position of promoter in Companies Act, 1956 and in different Statues
The expression ‘promoter’ has not been defined under the Companies Act, 1956, although the term is used expressly in sections 62, 69, 76, 478 and 519. Section 62 of Companies Act, 1956 defines ‘promoter’ for the limited purpose of that section only. Section 62(6)(a) defines the expression ‘promoter’ to mean a promoter who was a party to the preparation of the prospectus or of a portion thereof containing the untrue statement, but does not include any person by reason of his acting in a professional capacity in procuring the formation of the company.
In Twycross v. Grant promoter was described as “one who undertakes to form a company with reference to a given project, and to set it going, and who takes the necessary steps to accomplish that purpose.”
In USA, the Securities Exchange Commission Rule 405(a) defines promoter as a person who, acting alone or in conjunction with other persons directly or indirectly takes the initiative in founding or organizing the business enterprise.
In Lagunas Nitrate Co. v. Lagunas Syndicate [1889] 2 Ch. 392 (p. 428, C.A.), it was stated that “to be a promoter one need not necessarily be associated with the initial formation of the company; one who subsequently helps to arrange floating of its capital will equally be regarded as a promoter.
The difficulties in defining the term led the judges to state that the term promoter is not a term of art, nor a term of law, but of business.
Position of promoters in Companies Act, 2013
The new Companies Act, 2013 has defined promoter in Section 2(69) as;
“promoter” means a person—
a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or
b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;
A person who acts in a professional capacity is not a promoter. Thus a solicitor, who prepares on behalf of the promoters the primary documents of the proposed company, is not a promoter. Similarly an accountant or a valuer who helps the promotion in his professional capacity is not a promoter. But any such person may become a promoter if he helps the formation of the company by doing an act outside the scope of his professional capacity.
A person cannot; however become a promoter merely because he signs the memorandum as a subscriber for one or more shares.
In conclusion, it may be said that word “promoter” is used in common parlance to denote any individual, syndicate, association, partnership or a company which takes all the necessary steps to create and mould a company and set it going.
3. Duties of Promoter
The promoters occupy an important position and have wide powers relating to the formation of a company. It is, however, interesting to note that so far as the legal position is concerned, he is neither an agent nor a trustee of the proposed company. But it does not mean that the promoter does not have any legal relationship with the proposed company. The promoters stand in a fiduciary relation to the company they promote and to those persons, whom they induce to become shareholders in it.
Following are the major Duties of the promoter:
3.1. Duty to disclose secret profits
A promoter is not forbidden to make profit but to make secret profits. He may make a profit out of promotion with the consent of the company, in the same way as an agent may retain a profit obtained through his agency with his principle’s consent.
A promoter is allowed to make a profit out of a promotion but with the consent of the company.
3.2.Duty of disclosure of interest
In addition to his duty for declaration of secret profits, a promoter must disclose to the company any interest he has in a transaction entered into by it. This is so even where a promoter sells property of his own to the company, but does not have to account for the profit he makes from the sale because he bought the property before the promotion began. Disclosure must be made in the same way as though the promoter was seeking the company’s consent to his retaining a profit for which he is accountable.
3.3. Promoter’s duties under the Indian Contract Act
Promoter’s duties to the company under the Indian Contract Act have not been dealt with by the courts in any detail. They cannot depend on contract, because at the time the promotion begins, the company is not incorporated, and so cannot contract with its promoters. It seems, therefore, that the promoter’s duties must be the same as those or a person, who acts on behalf of another without a contract of employment, namely, to shun from deception and to exercise reasonable skill and care. Thus, where a promoter negligently allows the company to purchase property, including his own, for more than its worth, he is liable to the company for the loss it suffers. Similarly, a promoter who is responsible for making misrepresentations in a prospectus may be held guilty of fraud under section 17, of the Indian Contract Act and consequently liable for damages under section 19 of the Act.
3.4.Termination of Promoter’s Duties
A promoter’s duties do not come to an end on the incorporation of the company, or even when a Board of directors in appointed. They continue until the company has acquired the property or business which it was formed to manage and has raised its initial share capital and the Board of directors has taken over the management of the company’s affairs from the promoters. When these things have been done, the promoter’s fiduciary and contractual duties cease.
3.5.Remedies available to the company against the promoter for breach of his duties
Since a promoter owes a duty of disclosure to the company, the primary remedy in the event of breach is for the company to bring proceedings for rescission of any contract with him or for the recovery of any secret profits which he has made.
3.5.1. Rescission of contract
So far as the right to rescind is concerned, this must be exercised on normal contractual principles, that is to say, the company must have done nothing to show an intention to ratify the agreement after finding breach involving non-disclosure or misrepresentation.
3.5.2. To recover secret profit
If a promoter makes a secret profit or does not disclose any profit made, the company has a remedy against him.
4. Liabilities on Promoter
A promoter is subjected to liabilities under the various provisions of the Companies Act.
· Section 26 of the Companies Act, 2013 lay down matters to be stated in a prospectus. A promoter may be held liable for non-compliance of the provisions of the section.
· Under section 34 and 35, a promoter may be held liable for any untrue statement in the prospectus to a person who subscribes for shares or debentures in the faith of such prospectus. However, the liability of the promoter in such a case shall be limited to the original allottee of shares and would not extend to the subsequent allotters.
· According to section 300, a promoter may be liable to examination like any other director or officer of the company if the court so directs on a liquidator’s report alleging fraud in the promotion or formation of the company.
· A company may proceed against a promoter on action for deceit or breach of duty under section 340, where the promoter has misapplied or retained any property of the company or is guilty of misfeasance or breach of trust in relation to the company.
The Madras High Court in Prabir Kumar Misra v. Ramani Ramaswamy [2010] 104 SCL 174, has held that to fix liability on a promoter, it is not necessary that he should be either a signatory to the Memorandum/Articles of Association or a shareholder or a director of the company. Promoter’s civil liability to the company and also to third parties remain in respect of his conduct and contract entered into by him during pre-incorporation stage as agent or trustee of the company.
5. Status of pre-incorporation of contracts
The promoter is obligated to bring the company in the legal existence and to ensure its successful running and in order to accomplish his obligation he may enter into some contract on behalf of prospective company. These types of contract are called ‘Pre-incorporation Contract.
Nature of Pre-incorporation contract is slightly different to ordinary contract. Nature of such contract is bilateral, be it has the features of tripartite contract. In this type of contract, the promoter furnishes the contract with interested person and it would be bilateral contract between them. But the remarkable part of this contract is that, this contract helps the perspective company, who is not a party to the contract.
One might question that ‘why is company not liable, even if it a beneficiary to contact' or one might also question that ‘doesn't promoter work under Principal-Agent relationship. Answer to these entire questions would be simple. The company does not in legal existence at time of pre-incorporation contract. If someone is not in legal existence then he cannot be a party to contract.
Before the passing of the Specific Relief Act 1963, the position in India, regarding pre-incorporation contract, was similar to the English Common Law. This was based on the general rule of contract where two consenting parties are bound to contract and third party is not connected with the enforcement and liability under the terms of contract. And because company does not come in existence before its incorporation, so the promoter signs contract on behalf of company with third party, and that is why the promoter was solely liable for the pre-incorporation contract.
However, the provisions of the specific relief Act, 1963 makes the pre-incorporation contracts valid. Section 15(h) and Section 19 (e) of the Specific Relief Act of 1963, deviat from the common law principles to some extent,
Under section 15 (h) of the Specific Relief Act, 1963,
Except as otherwise provided by this Chapter, the specific performance of a contract may be obtained by--
(a) any party thereto;
(b) the representative in interest or the principal, of any party thereto
Provided that where the learning , skill, solvency or any personal quality of such party is a material ingredient in the contract, or where the contract provides that his interest shall not be assigned, his representative in interest or his principal shall not be entitled to specific performance his part of the contract, or the performance thereof by his representative in interest, or his principal, has been accepted by the other party; when the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of the incorporation, the company.
Under Section 19 (e) of the Specific Relief Act, 1963,
Except as otherwise provided by this Chapter, specific performance of a contract may be enforced against the company, when the promoters of a company have, before its incorporation, entered into a contract for the purpose of the company and such contract is warranted by the terms of the incorporation.
In Weavers Mills Ltd. v. Balkies Ammal [AIR 1969 Mad 462], the Madras High Court extended the scope of this principle through its decision. In this case, promoters had agreed to purchase some properties for and on behalf of the company to be promoted. On incorporation, the company assumed possession and constructed structures upon it. It was held that even in absence of conveyance of property by the promoter in favor of the company after its incorporation, the company’s title over the property could not be set aside.
Promoters are generally held personally liable for pre-incorporation contract. If a company does not ratify or adopt a pre-incorporation contract under the Specific Relief Act, then the common law principle would be applicable and the promoter will be liable for breach of contract.
In Kelner v Baxter, where the promoter in behalf of unformed company accepted an offer of Mr. Kelner to sell wine, subsequently the company failed to pay Mr. Kelner, and he brought the action against promoters. Erle CJ found that the principal-agent relationship cannot be in existence before incorporation, and if the company was not in existence, the principal of an agent cannot be in existence. He further explain that the company cannot take the liability of pre-incorporation contract through adoption or ratification; because a stranger cannot ratify or adopt the contract and company was a stranger because it was not in existence at the time of formation of contract. So he held that the promoters are personally liable for the pre-incorporation contract because they are the consenting party to the contract.
In Newborne v Sensolid (Great Britain) Ltd, Court of Appeal interpreted the finding of Kelner v Baxter in a different way and developed the principle further. In this case an unformed company entered into a contract, the other contracting party refused to perform his duty. Lord Goddard observed that before the incorporation the company cannot be in existence, and if it is not in existence, then the contract which the unformed company signed would also be not in existence. So company cannot bring an action for pre-incorporation contract, and also the promoter cannot bring the suit because they were not the party to contract.
This case created some amount of confusion that, if the contract was sign by the agent or promoter, then he will be liable personally and he has the right to sue or to be sued. But if a person representing him as director of unformed company enters into the contact then the contact would be unenforceable.
These principles were found applicable in Indian case.
In Seth Sobhag Mal Lodha v Edward Mill Co. Ltd., the High Court of Rajasthan followed the approach of Common Law regarding liability of pre-incorporation contract. This case was criticized by A. Ramaiya in Guide to Companies Act (Sixth Edition), he found that learned judges did not noticed the Specific Relief Act.
Although under common law promoter is personally liable for the pre-incorporation contract, but there are some scope where the promoter can shift his liability to company. He can shift to company his liability under the Specific Relief Act 1963 or he can go for novation under contract law. In Howard v Patent Ivory Manufacturing, the English Court accepted the novation of contract.
In conclusion we can say that, a promoter is personally liable for the pre-incorporation contract, because at the time of formation of pre-incorporation contract, the company does not come in existence, so neither the principle agent relationship exist not the company become the party. Company is not liable for the pre-incorporation contract when it come in existence, but under the arrangement of section 15(h) and 19(e) of the Specific Relief Act 1963, company can take the rights and liability of promoter. It is also found that promoter is personally liable for the pre-incorporation contract in American Law, English Law and Indian Law.
6. Case Analysis
To further analyze the role of promoter in Company's establishment we have done case analysis.
The first case we have taken is Kelner v Baxter (1866) LR 2 CP 174, which is a UK company law case which resulted into a landmark case that established the principle of Promoter’s liability in pre-inco
Thanks & Regards,
CS Rakesh
Rakesh Sharma
Certain other views
How the word Promoter has been defined?
The promoter has been defined as a person or persons who are in over-all control of the company, who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public and those named in the prospectus as promoters(s). It may be noted that a director / officer of the issuer company or person, if they are acting as such merely in their professional capacity are not be included in the definition of a promoter. 'Promoter Group' includes the promoter, an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of theperson or of the spouse). In case promoter is a company, a subsidiary or holding company of that company; any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter; any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company.
In case the promoter is an individual, any company in which 10% or more of the
share capital is held by the promoter or an immediate relative of the promoter'
or a firm or HUF in which the 'Promoter' or any one or more of his immediate
relative is a member; any company in which a company specified in (i) above,
holds 10% or more, of the share capital; any HUF or firm in which the aggregate
share of the promoter and his immediate relatives is equal to or more than 10%
of the total, and all persons whose shareholding is aggregated for the purpose
of disclosing in the prospectus "shareholding of the promoter group".
Analysis of the New SEBI Promoter Re-classification Norms
Shareholders in a listed company are classified under two broad categories, i.e., those that belong to the promoter / promoter group and those shareholders who are members of the public with no familial or formal business ties with the promoter / promoter group. The Securities and Exchange Board of India (SEBI), in its last concluded Board Meeting on June 23, 2015, has announced its intention to put in place a regulatory mechanism for re-classification of promoters of listed companies as public shareholders. Till date, there were no specific rules in place which allow a promoter or a member of a promoter group to exit this so called “group” and become a “public shareholder”.
Regulation 2(za) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations) defines a “promoter” to include (a) person or persons who are in control of the issuer; or (b) person or persons who are instrumental in the formulation of a plan or programme pursuant to which specified securities are offered to public; or (c) the person or persons named in the offer document as promoters. “Promoter group” inter alia includes promoters, their immediate relatives (spouse, parents, siblings, children of the person or that of spouse) and any body corporate in which 10% or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family (HUF) in which the promoter or any one or more of his immediate relative is a member. Those shareholders falling outside the scope of promoter / promoter group definitions are considered to be public shareholders.
According to the SEBI press release, a promoter’s shareholding may be reclassified and can become public shareholding in three situations, i.e., when (a) there is a change in the promoter; or (b) death of the person named as promoter; or (c) when a company becomes professionally managed. I shall now analyze all the three situations and the conditions thereunder that need to be satisfied for successful reclassification.
Change in promoter
A change in the promoter of a company may occur when a new promoter replaces the existing promoter through an acquisition of shares or control that results in an open offer being made under SEBI’s Takeover Regulations or in any other manner, subject to two more conditions: (a) that the outgoing promoter’s shareholding is less than 10% and (b) the outgoing promoter will have to obtain the approval of the shareholders of the company in a general meeting for de-classification as a promoter (which seems to be an ordinary resolution).
These two conditions appear confounding. As is clear from the definition of promoter, no shareholder approval is necessary for one to be named as promoter. There are no barriers to entry into this club of “promotership”. As per the definition, the promoter does not even have to hold 10% of the target’s equity to call such shareholder a promoter. But once a person been named as a promoter, such person cannot become a public shareholder until he or she hold less than 10% and obtain shareholders’ approval! What if the existing promoter holds more than 10% but obtains the approval of the shareholders to continue as a public shareholder? Or consider a situation where the existing promoter never held more than 10% and a new promoter replaces such person by making an open offer to acquire shares and control under the Takeover Code. Will the existing promoter still have to take the shareholders’ approval in a general meeting to be re-classified as a public shareholder if such person decided to hold on to the stake (which was less than 10% to begin with) for mere investment purposes with no role to play in the management of the company? From that perspective, the imposition of a 10% threshold in order to be eligible for re-classification appears to be wholly arbitrary. The rationale for obtaining shareholders’ approval is also unclear and it may prove to be onerous not only for the existing promoter but also for the new promoter and the company, as they will now have to expend considerable resources in calling for a general meeting and putting this item up for vote. It is also unclear as to how it may benefit the company or the public shareholders, if at all.
It also seems that SEBI wants the outgoing promoters to have very little, if not nothing, to do with the target company after they have been re-classified as public shareholders. The Press Release specifies that the outgoing promoter will have to obtain prior approval of the shareholders of the target if he or she wants to continue as a key managerial employee (KMP) in the target and in any case their appointment cannot exceed 3 years from the date of the shareholders’ approval. I find this condition very perplexing. What is the specific market failure or lacunae in corporate governance norms, if any, that SEBI is trying to address? It is obvious that SEBI is trying to prevent a Diageo vs. Dr. Vijay Mallya type of situation, in the future, by not only making it more difficult to retain erstwhile promoters in a professional capacity but also by imposing an absolute ban on them from continuing in the company for more than three years.
Promoter by way of inheritance
SEBI has clarified that in cases of transmission / succession / inheritance, the inheritor shall be classified as a promoter. The press release can be treated as a mere clarification of the existing legal position. Regulation 10 of the Takeover Regulations provides an exemption from making an open offer in cases of transmission / succession / inheritance.
Re-classification when no identifiable promoter
SEBI has allowed existing promoters to be re-classified as public shareholders where the company becomes professionally managed and does not have any identifiable promoter provided that no person or group along with persons acting in concert with them can collectively hold more than 1% of the company’s shares. However, mutual funds / banks / insurance companies / financial institutions / FPIscan each hold up to 10% of the shares of the company. Most listed companies in India are family run and professionally managed firms are few and far between.
As far as the first condition is concerned, I feel that the threshold of 1% is extremely low. There could be situations where the existing promoters may cease to exercise control or manage the affairs of the company, directly or indirectly, but may want to retain their shares for purely investment purpose and continue in the company as a public shareholder. By setting the threshold so low it also appears that SEBI is not comfortable with a promoter-less company.
It is also crystal clear that SEBI is not in favour of a situation where the erstwhile promoter holds an important position in the company. He / she is required to obtain the shareholders’ approval to continue as a KMP and in any case the appointment cannot exceed more than 3 years from the date of approval.
Additional Conditions
SEBI has also imposed certain additional conditions which are required to be satisfied for completion of reclassification, the most important of which are: (a) The existing promoter shall not have any special rights through any formal or informal arrangements; (b) even after the existing promoter’s shares have been reclassified as public, his / her shareholding cannot be counted towards achieving minimum public shareholding norms under the listing agreement read with Section 19A of the SCRA.
The draft paper on promoter reclassification that was released by SEBI for public comments specified that “post-reclassification, no shareholding agreement shall exist and all past agreements between (i) outgoing promoter / promoter group entities and the continuing promoter / promoter group entities and (ii) outgoing entities and the company, shall be made null and void.” The SEBI Notification of October 3, 2013, has allowed promoters of listed companies to enter into shareholders’ agreement with certain special rights between such shareholders. For example, put and call options, tag along rights, drag along rights, etc. under shareholders’ agreements are now valid. The existence of put and call options between two shareholders does not threaten either the company or other shareholders who are not party to the shareholders’ agreements. Further, the very concept of “special rights” is vague and will need to be clarified by SEBI. The existence of such rights between shareholders does not create any confusion as far as deciding the issue of control of the target company is concerned. It would have been acceptable for SEBI to bar the existing promoter from entering into any agreement which would confer voting rights on him / her disproportionate to his / her shareholding, but to ban all “special rights” seems a little excessive.
The second condition, interestingly, creates a third category of shareholders who are neither promoters nor public shareholders! Post re-classification, for the limited purpose of calculating the company’s total public shareholding for the purpose of compliance with Section 19A of the SCRA read with clause 40A of the listing agreement, the erstwhile promoter’s shareholding will not be considered even though for all other purposes the erstwhile promoter is actually a public shareholder!
Conclusion
In light of the arguments presented above, I feel that SEBI has been over cautious and has needlessly complicated the process of re-classification and made it onerous on the outgoing promoter. A simpler approach would have been to subject the issue re-classification of promoters to the test of “control” under the Takeover Code, given that the definition of control takes into account both de facto and de jure control and also given that it has been extensively tested in courts / tribunals. Additional protections that SEBI may feel necessary can be built on this basic premise. In such a scenario, if the outgoing promoter is not found to be in “control” of the company, then he / she should not be classified as a promoter. Those who seek re-classification of their shareholding may apply to SEBI with reasons stating why they are not in “control” of the company and SEBI may apply its mind and decide whether the applicant’s shareholding is eligible for reclassification. It has been my experience that SEBI has always insisted that those acquiring shares or control under the Takeover Code have been asked to classify themselves as promoters of the target company. Under this approach, once the open offer has been completed and a new promoter has been formally announced, the outgoing promoter can be classified as a public shareholder, as has been done in many instances in the past.
Source
http://www.moneycontrol.com/glossary/ipo/how-the-word-promoter-has-been-defined_791.html
http://indiacorplaw.blogspot.in/2015/06/analysis-of-new-sebi-promoter-re.html
Regards,
Rakesh
+91 9891560005
On Monday, October 12, 2015 at 3:21:17 PM UTC+5:30, lokesh sharma wrote:
Rakesh Sharma
As per SEBI Takeover Regulations, 2011
Meaning of ‘promoter’
According to regulation 2(1)(s) of SEBI Takeover Regulations, 2011, ‘promoter’ is defined under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 to include.
(i) the person or persons who are to control of the issuer;
(ii) the person or persons who are instrumental to the formulation of a plan or programme pursuant to which specified securities are offered to public;
(iii) the person or persons named in the offer document as promoters.
Simply professional employee or professional director is not a promoter
Director or officer of the issuer or a person, if acting as such merely in his professional capacity, shall not be deemed as a promoter.
Promoters includes “associates”
Whether the term “associates” includes the petitioners also as promoters i.e. joint promoters or to be treated only as non promoter associates is purely a question of fact to be ascertained from documents, conduct of and understanding between the parties.
In Priyanka Overseas Private v Passupati Fabrics Limited (2006) 132 Comp Cas 55 CLB: (2006) 2 Comp LJ 389 (CLB), the disputes between the parties have arisen in interpreting the term “promoters” with reference to the BIFR scheme wherein it is stipulated “promoters to buyback the shares from their own sources” of the shares worth 23 crores to be allotted to IDBI in terms of the scheme. The Company Law Board held that the CLB has no jurisdiction to determine this issue, as it is within the sole jurisdiction of BIFR, this issue appears to be the sole cause of disputes between the parties who have been smoothly carrying on together for nearly 15 years. The documentary evidence showed that the petitioners have always been treated as a part of promoters i.e. as joint promoters even though in some places they are shown as “associates” and in some places they are shown as “promoters.
Financial institution, scheduled bank, foreign institutional investor and mutual fund shall not be deemed to be a promoter
Financial institution, scheduled bank, foreign institutional investor and mutual fund shall not be deemed to be a promoter merely by virtue of the fact that 10% or more of the equity share capital of the issuer is held by such person.
Such financial institution, scheduled bank and foreign institutional investor shall be treated as promoter for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them.
Meaning of ‘Promoter Group’
‘Promoter group’ as defined in regulation 2(1)(t) of SEBI Takeover Regulations, 2011 means.
(i) the promoter;
(ii) as immediate relative of the promoter (i.e., any spouse of that person, or any parent, brother, sister or child of the person or of the spouse); and
(iii) In case promoter is a body corporate:
(a) a subsidiary or holding company of such body corporate;
b) any body corporate in which the promoter holds ten per cent, or more of the equity share capital or which holds ten per cent or more of the equity share capital of the promoter;
(c) any body corporate in which a group of individuals or companies or combinations thereof which hold twenty per cent, or more of the equity share capital in that body corporate also holds twenty per cent, or more of the equity share capital of the issuer; and
(iv) In case the promoter is an individual:
(a) any body corporate in which 10% or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of his immediate relative is a member;
(b) any body corporate in which a body corporate as provided in (a) above holds 10% or more of the equity share capital;
(c) any Hindu Undivided Family or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than 10% of the total; and
(v) all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus under the heading “Shareholding of the promoter group” :
Thus, if the promoter is an individual, his or her step children would be deemed to be promoter group. The limit for bringing a company into the promoter group has been sealed down to 10% or more shares, holds 10% or more shares would also be deemed to be in the promoter group. In case the promoter is a body corporate, the limit on holdings in shares for purposes of bringing those companies into the promoter fold has been brought down to 10%. The holdings for constituting companies under the same management for the purposes of bringing them into the promoter group fold has been fixed at 25%.
chandni shah
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