The Hindu Business Line : Shareholding pattern: Control by definition

CORPORATE India has been slowly but steadily changing the shareholding pattern over the past decade. The concept of a "promoter group" spearheading the fortunes of a company is becoming passé.

Increasingly, among professionally managed companies with widely dispersed holdings, there is no distinct promoter group and control rests with shareholders holding a small proportion of shares. In other cases, the promoter group with a small shareholding exercises control, with tacit understanding with other private corporate bodies that hold a significant equity stake. Recognising these radical changes in shareholding pattern, the Securities and Exchange Board of India recently put out a revised format for disclosure by companies. This proposal is available for public comment till the end of this month.

The new shareholding format proposed aims to dispense with the term "Promoter holdings" and replace it with "Controlling interest/Strategic holdings" held by any group of shareholders. In all fairness to the regulator, the rationale for the new format is laudable. But the crucial question is will it work in practice? It may not work and the reason for this rests primarily with the definition of "control" under this revised shareholding format.

Control has been defined to include:

The right to appoint majority of the directors, or

exercise control over management or policy decisions, directly or indirectly

persons named as promoters in any document filed with SEBI or stock exchanges.

This inclusive definition of control is in line with the format spelt out in the Takeover Code. First, the definition of control is loose and ambiguous. Both the right to appoint majority of directors and exercise control over management or policy decisions are tough to prove. In most cases, even an elaborate investigation may not reveal the control element. This has also been established in the recent takeover cases of Gujarat Ambuja-ACC and Grasim-L & T. In this backdrop, the board of any company can wriggle out of this disclosure obligation.

Second, there is little incentive for companies to adhere strictly to this disclosure of controlling interest. Every company will attempt to show a higher free-float of shares, as that would send a signal of higher liquidity and better price discovery. Mid- and small-cap companies which aim to attract higher trading interest will look for every opportunity to side-step the new shareholding format.

Hence, if SEBI wants this new disclosure format to work, it will have to consider a more precise definition of control. Otherwise, compliance may be very poor. There is little reason for SEBI to stick to the definition of control applied in the Takeover Code.

Leaving aside this ambiguity, there are parts of this new shareholding format which will go a long way in improving disclosure such as:

Disclosure under "controlling interest" of strategic stakes held by private corporate bodies/individuals.

Disclosure of "beneficial owners" under Global Depository Receipt (GDR)/American Depository Receipt (ADR) Programme. Currently, there is no way of establishing the real owners of these GDR/ADRs.

Holdings by such entities where the right of first refusal rests with the controlling shareholders.

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Shareholding pattern: Control by definition