ISSUE ISSUE XII : Amendment to listing agreement : A move towards increased transparency

Introduction

Securities Exchange Board of India (“SEBI”) is the regulatory body, which was instituted with the intent to protect investors’ interest and to keep a close eye on the securities market in India. On December 16, 2010, SEBI, vide its Circular No. CIR/CFD/DIL/10/2010 (“the Amendment”) made considerable changes in the Equity Listing Agreement (“the Agreement”)1 with the prime objective of ensuring greater transparency and efficiency in governance of listed entities. Most of the amendments have come into force with immediate effect, thereby seeking compliance from the aforementioned date itself. The purpose of this bulletin is to highlight the key changes in the Agreement and assess its potential impact on companies.

1. Disclosure requirements

1.1 Disclosure prior to listing of securities

Prior to the Amendment, the Agreement provided for continual disclosure of shareholding pattern within 21 days from the end of each quarter. SEBI, while taking a pro– active approach and retaining the aforementioned requirement, has now mandated that companies which seek to list their securities on a stock exchange post an initial public offer (“IPO”) are also required to disclose their shareholding pattern. This implies that shareholding will have to be disclosed even before the securities are listed. Such disclosure has to be made one day prior to their listing in the new format prescribed by the Amendment.2 The stock exchanges are also required to update the disclosure on their website before commencement of any trading in the said securities.3 The rationale behind this change is to keep investors informed on the most updated information about the company.

1.2 Disclosure pursuant to change in the capital structure of the company due to restructuring

Post the Amendment, all listed entities are also required to file revised shareholding pattern post any restructuring which leads to upward or downward change of 2% or more in paid-up capital of the company. This filing has to be done in the prescribed format within 10 days from the date of allotment of shares post such restructuring. This amendment makes disclosures more frequent and challenging, paving way for timely & updated dissemination of shareholding pattern of a company.

1.3 Disclosure pertaining to Depository Receipts

Listed entities that have issued Depository Receipts (“DRs”) overseas have to now bifurcate the disclosure pertaining to details of shares held by custodians and those against which DRs have been issued into “promoter/promoter group” and “public”. This raises a fresh ambiguity as to the treatment of these DR’s, as they have been segregated into two and it will be seen in course of time whether exclusion from total public shareholding would exclude DRs held by promoters as well.

“Public shareholding” is calculated as per equity shares held by public excluding shares held by custodians against whom DRs have been issued.4 In the new format for disclosing the shareholding pattern, DR’s are treated distinctly and excluded for the purpose of calculating the total public shareholding. However, since the Amendment distinguishes between DRs held by promoter and public, such DRs should ideally be included while computing the total public shareholding.

1.4 Disclosure pertaining to agreement with media companies

SEBI’s concerns over growing menace of “private treaties”5 between media companies and listed entities and its adverse effects6 lead to Press Council of India (“PCI”) guidelines. These PCI guidelines prescribe certain disclosures to be done by media companies in news items related to corporate entities in which they hold stake. Under the aforementioned guidelines, “private treaties” are also to be disclosed on all media companies’ websites.

Taking this further, SEBI has inserted a new provision in the Agreement whereby all listed entities have to immediately, upon entering into agreement with media companies and/or their associates, notify the stock exchanges and disseminate through their websites the following information –

  • Shareholding of such media companies and/or their associates in the listed company (if any).
  • Further disclosures pertaining to such agreements in the form of details of any nominee of media companies on Board of the listed company, any management control or any potential conflict of interest arising out of such agreement.
  • Moreover, disclosures pertaining to any more of such agreement/treaties/MOU’s as entered into by listed company with media companies and/or their associates.

Through this amendment, SEBI has provided some teeth to the aforementioned PCI Guidelines, as on their own they are neither mandatory in nature nor does the PCI have the necessary authority to seek their enforcement. This would help in curbing the practice of tainted news articles favouring big corporate houses, which have issued shares to media companies publishing them and would help in restoring some ethics in journalism. But on the downside, the newly inserted provision doesn’t seem to operate retrospectively, and takes only agreements entered into on or after December 16, 2010 within its purview.

1.5 Maintenance of a website

From April 1, 2011, all listed entities are required to maintain a fully functional website containing basic information about them, such as details of their business, shareholding pattern, status of compliance with corporate governance norms, an officer designated to deal with investor grievances, agreement with media companies etc. They are also required to keep their website updated at all times.

2. Concurrence with Securities Contracts (Regulations) Rules, 1957

Recent amendments7 to the Security Contract (Regulations) Rules, 1957 (“SCR Rules”), mandating listed entities to raise their public shareholding to a minimum of 25% (annually increasing it by 5%), has also led to consequent amendments to the Agreement.

The amended Agreement provides for the following methods, any of which can be used to raise the minimum public shareholding to the abovementioned prescribed levels –

  • Issue of shares to public through prospectus or;
  • Offer of shares held by promoters to public through prospectus or;
  • Sale of shares held by promoters through secondary market, with the prior approval of Specified Stock Exchange.

It is interesting to note that as the stipulation with regard to minimum public shareholding is applicable even at the time of an IPO, pricing of the shares holds much more importance for the success of an IPO as the prescribed percentage needs to be absorbed by public. The problem in maintaining minimum public shareholding would be graver in sectors where Foreign Direct Investment is restricted,8 as in such a scenario foreign investors would not like to reduce their shareholding and hence may put pressure on Indian promoters to dilute their stake. This can potentially give rise to fresh conundrum of “ownership” in case promoters’ shareholding falls below 50%.

3. Prior Announcement of date of Dispatch/Payment of Dividends & Credit of Bonus Shares

In an effort to increase transparency and keep investors informed so as to manage their cash flows better, it has been mandated that listed entities should pre–determine the date of dispatch/payment of dividends and credit/dispatch of bonus shares to shareholders. The same is to be intimated to stock exchanges along with particulars of board/shareholder meeting wherein such decision have been taken, within 15 minutes of completion of board/shareholder   meeting   as   per   the   present   framework.   It   is   applicable   on   all board/shareholder meeting convened on or after January 1, 2011 for this very purpose.

4. Non Compliance

Security Contract (Regulations) Act, 1957 (“SCR Act”) mandates that every company whose securities are listed on any stock exchange needs to comply with the conditions stipulated in the Agreement.9 Non–compliance with any of the requirements as specified in the Amendment, can lead to imprisonment for a term which may extend to ten years and/or fine which may extend to INR twenty five crores.10

Conclusion

Most of the amendments are pro–investors and certain key changes have been made in form of pre–announcement of date of payment of dividends and a methodology to achieve the minimum public shareholding requirement. However, some grey areas continue to exist and need to withstand the test of time. On the positive side, these enhanced disclosures and corporate announcements are expected to increase transparency, enlighten investors’ and create impediments for companies that are intending foul play. To conclude, compliance with the Amendment is important for any company looking to execute the Agreement with a stock exchange.

This bulletin is prepared by Ankush Goyal (under the supervision of Dhruv Suri, Associate) a final year law student at the Gujarat National Law University, Gandhinagar who completed his internship at PSA.

1Every company executes this Agreement with a recognized stock exchange before getting its securities listed.

2 Table (I) (a) to clause 35 of Agreement now requires that all partly paid-up shares, outstanding convertible securities and warrants to be segregated into “promoters” and “public category”.

3 Clause 35(a) of Agreement provides for this new disclosure requirement.

4 Section 2(e) of Security Contract (Regulation) Rules, 1957 defines “public shareholding”

5 Press Release – PR/3/10-11-PCI by Press Council of India – Guidelines concerning mandatory disclosure by the media of its stake in the corporate sector, dated August 2, 2010. “Private treaties” are agreements based on ‘ad for equity’ model between media companies and corporate entities, wherein media companies take stakes in company and in return provide media coverage through advertisements, news reports, editorials etc.

6 It is believed that these “Private treaties” give rise to tainted news articles favouring corporate entities in which media companies have shareholding. Moreover, it is considered to be an important instrument to garner publicity which can be misleading to the investors, most of the times.

7 See Securities Contracts (Regulation) (Amendment) Rules, 2010 dated June 4, 2010 and Securities Contracts (Regulation) (Second Amendment) Rules, 2010 dated August 9, 2010. For a detailed analysis of the amendments, see Going Public – Think Twice (25% Public Float Mandatory) (2010) available on http://www.psalegal.com/upload/publication/assocFile/Capital-Market-Bulletin-Issue- X07072010061331PM.pdf

8 In sectors like Insurance and Newsprint industry, foreign investment is restricted to 26%.

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