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Oct 11, 2017

Sebi to freeze promoter holdings if a firm violates minimum shareholding norms

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The markets regulator will impose fines and freeze (restrict promoters’ rights in decision making of the company) promoter shareholding if a company violates the minimum public shareholding (MPS) norms.

MPS requires a listed company to have at least 25% public shareholding.

In a circular issued on Tuesday, the markets regulator said that share depositories will freeze the entire shareholding of the promoters if a company is found to have failed to comply with the MPS norms for 15 days. The directors of the company will also be barred from holding such positions in other companies till the non-compliant company achieves 25% public shareholding.

In addition, non-compliance with the norms will attract a monetary penalty of Rs5,000 per day.

If the non-compliance continues for more than a year then the per-day penalty will rise to Rs10,000. In addition, all the securities held by the promoter would be frozen.

“The recognized stock exchange shall intimate the depositories to freeze all the securities held in the demat account of the promoter and promoter group till the date of compliance by such entity,” Sebi said in the circular.

The stock exchanges will also need to publish the names of the non-compliant companies, the amount of fine imposed, the days of non-compliance and the action taken against the promoters.

According to data compiled by Capitaline, 1,886 companies are not compliant with MPS norms. Out of the 1,886 firms, 1,795 firms are private sector listed companies. Considering that the Sebi circular is effective immediately all these firms (private) will face penalty and strictures in the next 15 days. These strictures would apply only to listed companies outside state control as state-run companies need to meet the MPS norms by March. Sebi on 4 June 2013 had passed an order directing non-state listed companies to comply with the 25% public shareholding requirement. However, state-controlled companies were given a deadline of August 2017 to adhere to the MPS requirement.

The deadline for state-run companies has been extended to March.

“Issuance of strictures and mandating penalties for non compliance of MPS norms will surely act as a deterrent for the violators,” said Anjali Aggarwal, partner and head-capital market and stock exchanges services, Corporate Professionals, a law firm

“But for any listed company, there may be certain corporate actions like forfeiture of partly paid shares, buybacks, takeover offers etc, wherein promoters holding crossing the threshold of 75% is beyond that company’s control. In my view, for imposition of any penalties/restrictions, a distinction may be carved for routine defaulters and for lapses that may happen because of any such corporate actions,” Aggarwal said.