Markets regulator Securities and Exchange Board of India (SEBI) recently published a new circular on the disclosure of shareholding patterns to investors by companies. Accordingly, companies will now need to disclose details pertaining to foreign ownership limits in a prescribed format.

Data on shareholding patterns is a crucial and price sensitive input to the investment decision, as it reveals the distribution of a company’s equity stakes among different entities. High FII or promoter holdings are generally considered to be an indicators of strong companies and good investment bets.

SEBI has been tweaking shareholding pattern disclosure norms to improve transparency for quite some time now. In the new disclosure rules, it has been proposed that listed entities need to disclose Board-approved limits and limit utilised at the end of a quarter, for foreign ownership. Besides, corporates have to disclose shareholders who are persons acting in concert, if available.

Sub-categorisation of shares

Under the new disclosure format, SEBI has also added a new column for sub-categorisation of shares under the public category.

Sub-categorisation will be based on the number of shares held under the three heads. Firstly, shareholders who are represented by a nominee director on the Board of the listed entity or have the right to nominate a representative (director) on the Board of the listed entity. Secondly, shareholders who have entered into shareholder agreements with the listed entity. Thirdly, shareholders acting as persons in concert with promoter. 

If a shareholder is falling under more than one category, then the same will be classified in the category falling first in the order prescribed in the format, the circular clarified. The circular will come into force with effect from the quarter ending September 30, SEBI said.

Until 2006, the shareholding pattern disclosure used to be a bland capture of the number of shares and percentage of holding by promoters and non-promoters. The non-promoters category was just divided into two: institutional (FIIs, MFs and DIIs holding); and others (Indian public, NRIs, corporate bodies, etc).

However, with the markets getting more sophisticated with wider participation, SEBI made interesting changes in the disclosure norms in 2006. It asked the companies to reveal the number of shareholders and also divided “Indian public” category into two (small investors holding up to Rs 1 lakh worth shares and HNIs: holding more than Rs 1 lakh). The threshold was subsequently raised to Rs 2 lakh.

Details on pledging

Another important change was made in 2009 with respect to pledging of shares. Several companies’ stock prices collapsed in the 2008 market crash. However, those in which promoters had pledged their shares to raise funds for personal use, came in for severe hammering, as financial institutions offloaded those shares in the secondary market when the promoter failed to meet margin commitments after initial price fall, aggravating the downslide.

In 2009, SEBI had asked the companies to reveal shares pledged by promoters, so that investors can take an informed decision.

2016 saw another historic decision by SEBI. It asked companies to disclose the names of shareholders who held more than one per cent in the company.

With the latest tweaks, SEBI has further raised the bar on disclosure norms. SEBI can also ask companies to disclose significant shareholders, who hold more than 1 lakh or 10 lakh shares in the company. Besides, it should also make it mandatory to disclose the names of persons acting in concert instead of keeping it optional.

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