Non-Promoter Shareholders of a Subsidiary May Be Classified as Promoter Group Post-Amalgamation; SEBI Clarifies

Informal Guidance No. SEBI/HO/CFD/PoD-2/OW/P/2024/16806/1, Dated: 14.05.2024

Brief facts of the case

M/s Anjani Portland Cement Limited is a public limited company incorporated under the Companies Act, 1956, and the equity shares of the company are presently listed on BSE and NSE. The company has one unlisted subsidiary and holds 99.09% of the total issued and paid-up share capital of the subsidiary company.

The Board of Directors of the company and subsidiary company has approved a scheme of amalgamation for the merger of the subsidiary company with the company and their respective shareholders and creditors under sections 230 to 232 of the Companies Act, 2013.

Upon the scheme becoming effective and in consideration for the amalgamation of the subsidiary company with the company, the company must issue and allot equity shares on a proportionate basis to the members i.e. other non-promoter public shareholders of the subsidiary company.

Queries placed before SEBI

The holding company (applicant) has sought informal guidance from SEBI on following matters:

• Whether a company classify the ‘other non-promoter shareholders’ of the subsidiary as ‘public shareholders’ and group them under ‘public shareholders’ post approval of the Scheme of Amalgamation, pursuant to Regulation 31 of SEBI (LODR) Regulations, 2015?
• Whether compliance with Clause 3(b) of SEBI Master Circular No. SEBI/HO/CFD/POD-2/P/CIR/2023/93, dated June 20, 2023, apply only on the Effective Date of the Scheme of Amalgamation, or would require continued compliance by the company even post-amalgamation?

SEBI Clarification to Query 1

As per the definition of ‘public’, it can be observed that a subsidiary company of a company is not included within the definition of the term ‘public’ under the Securities Contracts (Regulation) Rules, 1957. The same definition for the term “public’ has been adopted under the LODR Regulations.

Further, in terms of the definition of the term ‘promoter group’, a ‘subsidiary company’ is included within the ambit of the term ‘promoter group”. Taking guidance from the above definitions, it may be said that the shareholders of a subsidiary company may not be classified under the head ‘public’.

In the present case, the company stated that in its subsidiary company, 0.91% of shares are held by ‘other non-promoter public shareholders’. Therefore, it is not clear as to how the subsidiary company could classify the said shares under the ‘public shareholders’ category.

SEBI clarified that the shares allotted to such persons under the scheme of amalgamation may have to be classified under the ‘promoter and promoter group’ category. The Company may resort to the provisions of Regulation 31A of the LODR Regulations for re-classification, if it so intends.

SEBI Clarification to Query 2

As per Clause 3(b) of Part 1(A) of SEBI Master Circular SEBI/HO/CFD/POD-2/P/CIR/2023/93, dated June 20, 2023, the percentage of shareholding of pre-scheme public shareholders of the listed entity and the Qualified Institutional Buyers (QIBs) of the unlisted entity, in the post scheme shareholding pattern of the merged company on a fully diluted basis shall not be less than 25%.

SEBI observed that the above-mentioned clause requires compliance ‘before’ submitting the Scheme of Arrangement to the NCLT for schemes between listed and unlisted entities, as per the Master Circular. Also, since there is no mention of QIBs holding shares in the unlisted subsidiary, it must be ensured that the pre-scheme public shareholder’s percentage in the post-scheme shareholding pattern of the merged company remains at least 25% on a fully diluted basis.

Since the company would continue to be a listed entity even post the proposed scheme of arrangement, it must comply with the minimum public shareholding (MPS) requirements as specified in Rule 19(2) and Rule 19A of Securities Contracts (Regulation) Rules, 1957.

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