Can a listed company function without a ‘promoter’?

After the 2.8 percentage stake sale on Monday, the promoters’ holding in Infosys is now just a tad above 13 per cent. If the request of the founders last month to be not classified as promoters but as ordinary shareholders is accepted, the company will have no holdings under the ‘promoter’ category, though the founders retain their remaining stake.

But are listed companies allowed to have zero promoter holding? Yes. Among the S&P-CNX 500 companies, 12 currently fall in this category. This includes big Nifty names — HDFC, ITC, L&T, ICICI Bank, and IDFC.

Says Suresh Surana, Founder, RSM Astute Consulting Group: “It is permissible for companies to have zero promoter holding. The SEBI regulations require a minimum 25 per cent of public shareholding but there is no legal requirement of minimum promoter group holding. There are instances of companies with no promoter holding and the companies can be professionally managed. This is very common in the US.”

Concurs Darshan Upadhyay, Partner, Economic Laws Practice: “Under law, a company is managed by its board of directors. If it has no identifiable promoter, the board, shareholders and the articles of association would be the guiding factors.”

SEBI rules require that promoters should hold at least 20 per cent of the post- public issue capital and this should be locked in for at least three years. After this, promoters can pare their stake.

Both the Companies Act 2013 and the SEBI regulations have ‘control’ of the company as a key parameter to decide whether one is a promoter — either as an original founder or by acquiring stake in the company. With the Infosys founders no longer actively involved in day-to-day management and control of the company, there is a good chance that their request to be classified as non-promoters will be eventually accepted by SEBI.

At present, SEBI has been considering such requests for re-classification of promoters’ shareholding into public shareholding, on a case-to-case basis. Approvals have been granted based on the merit of each case. Surana adds: “For example, approval was given to the Poddar family, the original promoters of Gillette India, to reclassify themselves as public shareholders after they agreed to give up all special rights in the company, including management control.”

Upadhyay adds: “There is currently no regulation that lays down steps on how a promoter could be declassified. I understand SEBI is likely to come up with a policy or regulation on how such declassification could be done.”

But why would promoters want to be reclassified as public shareholders? Because it gives them flexibility by doing away with several rules on various matters including purchase and sale of shares in the company.

The SEBI Insider Trading Regulations and SEBI (Substantial Acquisition of Shares and Takeover) Regulations govern purchase and sale of shares by promoters. Says Surana: “The legal implication of existing promoters wanting to be classified as non-promoters is that the above regulations for sale or purchase of shares would not then apply to them. They would be treated at par with the other public shareholders with fewer compliance and disclosure requirements.”

COMMENT NOW